A 93 per cent share price fall or loss of $1.8 billion of market capitalisation is ugly whichever way you look at it. But as shareholders in Far East Pharmaceutical Technology examine their near-worthless scrip, they might be asking how it came to this. Bad things do happen - this time a company chairman going temporarily AWOL - but it is the reaction to the problem that determines its magnitude. If Hong Kong had any pretensions to running a mature equity market, it was dealt a blow by the rumour-ridden and margin-driven sell-down in this mid-cap drug and vitamin maker. Investors need to know if this was a one-off, or if other privately owned China shares could succumb to the same fate. The trigger on the surface was merely an inability to contact chairman Cai Chongzhen. Even speculation that Mr Cai was in trouble with officialdom, rather than recuperating in hospital, would have been less troubling were he not the majority owner of Far East Pharmaceuticals and effective guarantor of its bank loans. While other organisations rely heavily on one key figure, such as Rupert Murdoch at News Corp or Jack Walsh at General Electric, the big difference is the chairman was not just providing leadership or strategic direction but also guaranteeing the firm's financial viability. If Mr Cai leaves or sells his holding, loan covenants dictate the company's financial lines must end. The bankers' preoccupation with the chairman directly stems from a concern that unforeseen activities from his private life impinge on his public life. The company's latest published accounts showing $612 million cash in the bank and almost $300 million net of loans give little warning of impending disaster. The closest thing to a red flag is the lack of obvious explanation for why a US$80 million loan was needed as recently as last month. Yet arguably, shareholders only needed to follow the analysis of the company's bankers before selling - without the chairman it is bad business to finance this company. Still, it is unlikely the ensuing meltdown would have had the same ferocity without a heavy overlay of margin financing. Data from Hong Kong Exchanges and Clearing reveals that mainland-backed Guotai Junan Securities subsequently became the unlucky new owner of a 25 per cent stake in this new penny stock. The collapse of Far East Pharmaceutical's share price also wiped out the collateral of countless margin investors, meaning their holdings became the property of Guotai in the absence of a cash settlement. Whether Mr Cai was also overextended is unknown, but a massive 680 million shares, almost 33 per cent of the shares outstanding, changed hands in one day. In the harsh world of defaulted margin agreements, the brokerage has discretion to sell at will rather than secure the best price for its clients. The fact that as lead manager Guotai brought this company to the market just four years ago, and probably put a lot of its clients into it, seems forgotten for now. Yet there is no hard and fast way to detect the amount of margin risk behind stocks, less the private leverage of controlling shareholders. The safest policy is to be wary of stocks promoted by investment banks which also offer aggressive margin financing.