Citic Pacific's second bid to halt fraud inquiry fails
Citic Pacific, the Beijing-backed steelmaker and property developer, yesterday lost a second bid to block a police fraud investigation into its failure to disclose a HK$15.5 billion loss immediately in 2008.
The Court of First Instance allowed police to access documents it seized from the Hong Kong-listed company in a raid in 2009.
The court also renewed the finding of a 'prima facie case' of conspiracy to defraud and false statements by company directors.
The alleged fraud arose from Citic Pacific's delay in publishing a profit warning by 43 days and failing to disclose a massive loss due to unauthorised investment in currencies.
Unless appealed by Citic, the ruling means police can now open its investigation into allegations that Citic Pacific defrauded at least three banks in obtaining HK$1.75 billion in loans, and its existing and potential investors by concealing the loss.
The documents include some internal communications which might well be commercially sensitive and minutes of meetings of the board of directors, records sent to and received from the Audit Committee and transcript of interviews with the Securities and Futures Commission.
It was the second victory for police. In March, the police won access to six documents containing legal advice that Citic passed to the SFC. The SFC later handed them to the Department of Justice.
According to the judgment handed down yesterday, Citic Pacific was aware of its financial exposure on September 7, 2008.
But its chairman, Larry Yung, went on to make a public statement on September 16 stating that the board of directors observed 'no material adverse change' in its financial position.
An announcement of the loss was not made until October 20.
On April 3, 2009, police empowered by a search warrant raided the Citic headquarters, seizing more than 1,500 documents including 'hundreds of thousands of pages' of hard-copy documents and more than 100 computer hard drives. The documents cover the period from July 22, 2008, to February 4, 2009.
Mr Justice Alan Wright ruled that Citic Pacific failed to assert a blanket claim that the documents contained legal advice, and were therefore protected by legal professional privilege, or that some of the documents were seized outside the scope of the search warrant. He ruled that all the documents created after Citic became aware of the huge loss were not protected by privilege as such legal advice was sought to facilitate or further the commission of crime.
On the finding of potential fraud against the banks, Wright wrote: 'It must be self-evident that prior to the date of the granting of the three loans an application would have been made to the respective lenders.
'I draw that inference: loans are not granted in a vacuum - especially loans of this magnitude.
'I draw the inference that no such [financial risk exposure] disclosure was made at that time,' he wrote.
Earlier this month, Citic Pacific appealed against the ruling that police could have access to the six documents it handed to the SFC.
The Court of Appeal will hand down the judgment at a later date. Citic Pacific declined to comment.