How foreign exchange contracts blew up for Citic Pacific
Citic Pacific initially benefited from market-beating exchange rates before poorly judged foreign exchange contracts and a HK$14.7 billion loss landed the firm in a markets misconduct tribunal, a key inside witness said yesterday in a closely watched case that has wide implications for director responsibilities.
A former assistant director of finance at Citic Pacific, Simon Chui Wing-nin told the tribunal; “The original purpose of doing this all along was Citic Pacific going into TRF (target redemption forward) contracts wanting to lock in on an exchange rate that was lower than market rate.”
The most senior ex-Citic executive to give evidence so far, Chui explained how TRF allowed the firm to roll over contracts every month, benefiting from a favourable exchange rate between Australian and US dollars as the Hong Kong-listed firm launched an ambitious Australian mining venture.
Those contracts later blew up when the Australian dollar moved sharply against the US dollar in 2008 triggering huge downside payouts from Citic to counterparties.
Now in its third week, the tribunal will decide whether red chip Citic Pacific, now known as Citic Ltd, and five former directors were “reckless” and “negligent” for signing off on a “false or misleading” exchange filing on September 12, 2008 that made no mention of the multibillion dollar losses the directors allegedly knew about.
The case is a vanguard action for a wider High Court case brought against Citic by Hong Kong’s securities regulator, the Securities and Futures Commission, seeking HK$1.9 billion in compensation for 4,500 affected investors who traded the firm’s shares between September 12 and October 20, 2008 when Citic did issue a profit warning that sent the share price plummeting and ultimately racked up HK$14.7 billion in losses for the company.
A victory for the SFC at the tribunal could result in fines and directorship disbarments for those found at fault and would strengthen the regulator’s hand in the High Court.
Counsel for the defendants are taking the position that the full extent of the losses were unclear at the time the fateful exchange filing was issued.
Chui said he would ask colleagues at the firm’s Australian operation how much local currency they needed and then report that number to his finance department supervisors, Frances Yung Ming-fong and Leslie Chang Li-hsien, who would then tell him how many foreign exchange contact orders to place. Chui said he did not know who made the final decision on which contracts to buy.
The daughter of former Citic chairman Larry Yung Chi-kin, himself one of the defendants at the tribunal, Frances Yung. is expected to give evidence later this week.
In 2014 Chui pleaded guilty to insider trading in the shares of Citic Pacific stock, having dumped them before the 2008 losses were publicly announced, and was handed jail time and a fine.
Pummelled by crashing commodity prices, Citic’s ill-timed Australian foray won a small reprieve this week when the Supreme Court of Western Australia rejected a A$48 million royalties lawsuit brought against Citic by outspoken mining tycoon turned politician Clive Palmer.