Refund blow for Hontex investors
Investors who bought shares in troubled fabric maker Hontex International Holdings have little hope of getting their money back any time soon. The High Court yesterday decided against ordering the company to refund the HK$1 billion it raised through an initial public offering in December 2009.
Mr Justice Jonathan Harris ruled that any order to refund the money could only be made after a trial to determine if the company had committed misconduct.
He set a three-week trial for June of next year, which will allow the Securities and Futures Commission (SFC) and the company time to present their evidence and arguments to determine if any malpractice occurred that would require the firm to make compensation.
SFC lawyer Simon Westbrook argued in the court yesterday that a refund order could be granted immediately because Hontex had already admitted - in a company announcement last August - that financial figures in its listing prospectus were not reliable, and had concluded that investors should be granted compensation.
Westbrook also said that, as the Hontex management were either in Taiwan or on the mainland, any potential prosecution would be difficult, as the respective jurisdictions had no extradition arrangements with Hong Kong.
However, Hontex's lawyer rejected that argument, saying the SFC could not use the approach that 'we are the SFC and we can do what we want'.
Judge Harris concluded he was not comfortable ordering a refund, saying any decision would need to wait until after the trial next June. Alternatively, the SFC could take the case to the Market Misconduct Tribunal to determine the matter.
The judge questioned why a company as problematic as Hontex was allowed to list in the first place.
The SFC last year won a court order freezing the HK$1 billion in IPO proceeds. It also suspended the stock from trading on March 30 of last year after accounting problems emerged. The firm only traded for 64 days - the shortest trading period in Hong Kong's history.
The SFC in May sought a final order to force the Fujian-based company to use the frozen IPO proceeds to compensate all small shareholders who held Hontex stock at the time it was suspended from trading. These included investors who bought the shares in the IPO, as well as those who bought Hontex shares in the secondary market.
In applying for the order, the SFC said Hontex had disclosed materially false or misleading information in its IPO prospectus, which was likely to have induced investors to subscribe to the shares.
In the prospectus, Hontex had said it enjoyed strong profit growth in the three years leading up to its listing, with an income of 242.34 million yuan (HK$275.76 million) in 2008, an increase of 42 per cent from 2007 - which in turn was 66 per cent more than it made in 2006.
The court decision yesterday is another setback for the SFC. In a separate court case, Harris last month rejected a bid by the SFC to freeze HK$38.5 million worth of assets belonging to the US hedge fund Tiger Asia Management and the fund's three executives.
The SFC sought the court order after alleging the US hedge fund had been involved in insider dealing in Hong Kong in 2008 and 2009. Harris, however, insisted on a formal trial to determine the culpability of the funding house before an order to freeze money could be made.
The stock price for Hontex on the Hong Kong exchange on its final day of trading
- The offer price was HK$2.15 per share