An insider dealing tribunal hearing allegations against two China Apollo Holdings directors has widened the inquiry to include 'potentially serious criminal allegations'.
These include false accounting and conspiracy to defraud.
The inquiry into trading by executive director Zhang Tie-cheng and financial director and company secretary Raymond Lau Chan-wing is also looking at an exceptional item in the company's 1995 year-end accounts. In the words of the tribunal's former chairman, Mr Justice Michael Hartmann, there is a 'pall of suspicion' over the item, which 'conveniently' brought a profit forecast up to scratch.
'What we have is a situation where it now appears, perhaps, and all we are doing is following a line of inquiry . . . that the profit forecast may have been - may, I stress - massaged to a greater degree than . . . appeared initially,' the judge said.
The two directors challenged the new line of inquiry but this was overruled by the current tribunal chairman, Mr Justice Gareth Lugar-Mawson.
He rejected claims that it would be unfair and abuse of process.
It had been argued, he said, that it would 'take the tribunal into areas way beyond insider dealing and into areas of potentially serious criminal allegations' which included false accounting and conspiracy to defraud.
He noted: 'While the above is true, the additional lines of inquiry do not fall outside the scope of insider dealing. They are relevant to the issue of whether or not such dealing took place.'
Moreover, he added, there was nothing to prevent the tribunal from inquiring into matters which could have criminal connotations.
The two directors are accused of insider dealing between March 1 and March 21, 1996. It is alleged that options were exercised two months before the company's 1995 results.
The company, which makes health-drink products in the mainland, had forecast in its listing prospectus in 1995 that it could achieve a profit of at least HK$190 million without exceptional items.
But when it announced the annual result in May 1996, it reported a profit of HK$192 million boosted by HK$15.8 million in exceptional items.
This prompted the stock exchange to investigate why the company failed to achieve its forecast profit, as it may have misled investors who purchased shares.
The share price plunged 30 per cent in two days after news of the lower-than-forecast profit.
In justifying the expanded scope of the tribunal, Mr Justice Hartmann told the inquiry that there could be 'a greater motive for insider dealing', in terms of raising the necessary funds to bring the forecast up to date.
Mr Justice Lugar-Mawson explained that the bulk of the evidence on this new line of inquiry would most likely 'come from the implicated parties themselves, as they are the ones best placed to explain the transactions under scrutiny'.
It was argued that reasons and motives were irrelevant in terms of insider dealing. Mr Justice Lugar-Mawson responded: 'There cannot be any doubt that evidence of reasons and motive is a highly relevant factor.'