Disgorgement order against chairman and senior executives for disclosure of false or misleading information

Written By: and on CORPORATE INVESTIGATIONS, FORENSIC ACCOUNTING NEWS

Key Takeaways
  • Market Misconduct Tribunal issues largest ever disgorgement order in the amount of HK$481,969,785.
  • JLA instructed by Securities and Futures Commission to prepare expert reports and testify.

On 26 June 2017, the Market Misconduct Tribunal (“MMT”) ordered the former chairman and chief executive officer of Greencool Technology Holdings Limited (“Greencool”), Mr Gu Chujun, to disgorge HK$481,969,785 whose dishonest practices were found to have resulted in market misconduct.

Mr John Lees of JLA Asia was instructed by the Securities and Futures Commission of Hong Kong (“SFC”) to provide expert evidence. He was called by the SFC to give expert testimony and his reports were accepted by the MMT.

Background of Greencool

Greencool was incorporated in the Cayman Islands in January 2000, and was listed on the GEM in July 2000 (stock code 8056). Its principal businesses were firstly marketing and sale to authorized agents of a new form of refrigerant known as Greencool Refrigerant which contained no chlorofluocarbon (“CFC”), and secondly treating air-conditioning and refrigeration systems by replacing the exisiting CFC refrigerant with Greencool Refrigerant.


The SFC revealed that this was its “most complex investigation conducted at the time”.

SFC Investigation

The SFC instituted proceedings in both the Court of First Instance (“CFI”) and the MMT against former chairman and chief executive officer, Mr Gu Chujun, and other senior executives of Greencool, alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004.

The SFC revealed in its press release of 23 June 2014 that the investigation had taken seven years, “making it the most complex investigation conducted at the time”.

Disgorgement Order

In its press release of 26 June 2017, the SFC announced that:-

This is the largest disgorgement order amount ever imposed by the MMT to date.

On 29 December 2016, the MMT found Gu, three former directors, namely Mr Zhang Xihan, Mr Hu Xiaohui, Mr Xu Wanping, and former financial controller Mr Henry Mok Wing Kai, had been involved in disclosing false or misleading information inducing transactions under the Securities and Futures Ordinance by grossly overstating Greencool’s sales, profit, trade receivables, bank deposits and the company’s net asset value for the financial years ended 31 December 2000 to 2004 by approximately RMB487 million, RMB653 million, RMB982 million, RMB1,062 million and RMB904 million respectively which represents 43 per cent to 80 per cent of Greencool’s total net assets in these years (Notes 2 & 3).

The MMT also imposed:

  • disqualification orders against Gu, Zhang, Hu and Xu from being or continuing to be a director or taking part in the management of a listed corporation, or any company in which a listed company directly or indirectly has a shareholding, for five years from 1 October 2017;
  • a disqualification order against Mok from being a director of a listed company for three years from 1 October 2017;
  • a cold shoulder order against Gu for five years, to prevent him from directly or indirectly, dealing in any securities, futures contracts or leveraged foreign exchange contracts, or any interest in these products from 1 October 2017.
  • cease and desist orders against Gu, Zhang, Hu and Xu, to prohibit them from engaging in any market misconduct. Future acts of market misconduct by them will be a criminal offence.

The MMT further ordered:

  • Gu, Zhang, Hu and Xu each pay $5,130,000 for the SFC’s legal and investigation costs and the costs of the MMT proceedings, while Mok was ordered to pay $1,080,000; and
  • the MMT’s findings against Mok be referred to the Hong Kong Institute of Certified Public Accountants for disciplinary proceedings.

The SFC would like to thank the enforcement agencies in Mainland China that have provided continuous assistance in this matter.

Expert Evidence

Mr Lees was called by the SFC to give expert testimony and his reports were accepted by MMT. His expert evidence is summarised in paragraph 142 of the MMT Report as follows:

  1. Mr John Lees, a Fellow of the Hong Kong Institute of Certified Public Accountants and a practising member of the Academy of Experts, was asked to prepare two expert reports. The first and principal report (‘the principal report’) was dated 14 March 2014. The second and supplementary report (‘the supplementary report’) was dated 24 July 2015.
  2. In respect of the principal report, the SFC asked Mr Lees to comment whether, over the relevant five-year period, the Specified Persons should have had grounds for concern, first, as to the unusually high cash balances held in the Group’s various bank accounts and, second, as to the accuracy of the loan balances. If such grounds were demonstrated, Mr Lees was asked to give his opinion as to what actions the Specified Persons should have taken to fulfil their respective duties;
  3. Mr Lees found that the Specified Persons all had valid reasons to question the accuracy of the unusually high amounts of cash held in the Group’s bank accounts and to question the accuracy of the loan balances;
  4. As to the actions that should have been taken, Mr Lees detailed what he considered to be the appropriate action that should have been taken by each of the Specified Persons according to the office each held in the Group. For example, in respect of the two Independent Non-Executive Directors – Ms Margaret Man being one of them – Mr Lees began his comments by saying

    “(a) All directors, including the INEDs, should have received board papers prior to each board meeting which should contain various reports that inform board members of the company’s financial position, progress of plans, and other important developments since the last board meeting. The INEDs should have spent sufficient time to review the board papers in detail. In the event that the board papers were not received by the INEDs, the INEDs should have insisted that the board papers be provided for their review;
    (b) obtained explanations from the board as to the reasons for retaining such significant bank balances for each of the 2000 to 2004 years, which represented approximately 66% to 84% of the total net assets of the Group during the review period;
    (c) obtained explanations from the board as to the reasons for retaining such significant bank balances for each of the 2000 to 2004 years, which represented approximately 66% to 84% of the total net assets of the Group during the review period;
    (d) obtained explanations from the board regarding the inconsistencies noted between the [Group’s gross profit margins and the gross profit margins of comparable companies];
    (e) be satisfied that the explanations… were reasonable and that they align[ed] with Greencool’s investment policy… ”

  5. Turning to the supplementary report, the focus of attention was on Mr Henry Mok, not in his capacity as the Company Secretary or as the Qualified Accountant under the GEM Listing Rules, but as the ‘Financial Controller’ of the Greencool Group. In this regard, the SFC instructions to Mr Lees were for him to comment on whether the fact that Mr Mok was a ‘Financial Controller’ put him in the same situation as the Executive Directors, Independent Non-Executive Directors and Audit Committee members and the extent of such duties; and
  6. In respect of these supplementary instructions, Mr Lees concluded that, as Financial Controller, Mr Henry Mok was responsible for overseeing and supervising all financial information of the Group. In the result, he was responsible for reviewing the accounts and records of all the companies in the Group, including Greencool, the BVI subsidiaries and the PRC subsidiaries. Mr Lees was of the opinion that, if he was unable to fulfil these duties, Mr Henry Mok could have sought recourse by appealing to the Board and/or to members of the Audit Committee, there being no record, however, that he had done so.

It is also reported that “in the judgement of the Tribunal [MMT], leaving aside other matters, it is satisfied that Mr Lees must have been correct in respect of the matters set out above” (paragraph 383).