Suspended sports-fabric maker Hontex International Holdings has called on the High Court to reject a lawsuit from the securities regulator seeking to force it to pay HK$1 billion in compensation to investors, arguing that the regulator lacked the hard evidence to prove its allegation the company's prospectus overstated its business.
At a High Court hearing yesterday, the Securities and Futures Commission (SFC) sought an order requiring Hontex to return to investors the HK$1 billion it raised in its initial public offering (IPO) in 2009. The SFC alleged Hontex's prospectus misled investors by overstating its turnover and profit before tax in the three years up to its listing. The regulator in March 2010 ordered Hontex to suspend trading and obtained a court interim order to freeze the HK$997.4 million raised in the IPO.
Hontex's lawyer Charles Manzoni argued that the SFC's allegation was not backed by strong evidence. He told Mr Justice Jonathan Harris, the SFC allegation should be proven to a criminal standard (proof beyond reasonable doubt), rather than the less demanding civil standard.
Harris said he would rule this week on whether it was appropriate for him to hear the case and to what standard the SFC must prove its allegations.
In a ruling in July last year, Harris said the SFC could not seek claims for investors from US hedge fund Tiger Asia Management unless it could first get the market misconduct tribunal to rule against Tiger Asia or obtain a criminal conviction on the insider dealing allegation against the hedge fund. But the Court of Appeal in February rejected Harris' ruling. Tiger Asia is now appealing to the Court of Final Appeal.
SFC lawyer Simon Westbrook said the appeal court ruling on Tiger Asia confirmed that the High Court could determine if the SFC could seek claims for investors under section 213 of the Securities and Futures Ordinance, with no need to get criminal convictions or a tribunal ruling on its allegation. He said it is impossible to have criminal prosecution of Hontex directors, based in Taiwan.
An SFC statement of claims against Hontex in October alleged that Hontex's prospectus had overstated its turnover by 380.93 million yuan in 2006, 708.89 million yuan in 2007 and 974.73 million yuan in 2008.
The SFC also alleges Hontex overstated its profit before tax by approximately 102.94 million yuan in 2006, 185 million yuan in 2007 and 298.29 million yuan in 2008. The commission also considered that the company had overstated its cash value and number of franchised stores.
In April, the SFC revoked Mega Capital (Asia)'s license and fined it HK$42 million over misleading information contained in Hontex's prospectus. Mega Capital was the sponsor of Hontex's IPO.