Insider Dealing on Chinney Alliance Group Limited

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The Insider Dealing Tribunal (IDT) has submitted to the Financial Secretary a report on its inquiry in relation to the listed securities of Chinney Alliance Group Limited (Chinney).

According to the report, the tribunal, under the chairmanship of the Honourable Mr Justice McMahon, concluded its findings by unanimous decision that Mr Joseph Lau Chung Yin has engaged in insider dealing.

The tribunal did not find the other named person to have engaged in insider dealing.

The tribunal will proceed to hear representations on a date to be fixed to determine the amount of profit gained or loss avoided and thereafter to make consequential orders and penalties.

The Chinney inquiry involves two implicated parties and 19 witnesses, with a total of 28 actual hearing days.

The summary of the tribunal's report is at the annexe.

Ends/Wednesday, December 15, 2004

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Annex

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Following is a summary of the tribunal's report -

Introduction

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By notice dated September 25, 2002, the then Financial Secretary required the IDT to institute an inquiry in relation to the listed securities of Chinney to inquire into and determine -

(a) whether there has been insider dealing in relation to the company connected with or arising out of the dealings in the listed securities of the company by or on behalf of -

Lau Chung Yin, Joseph and Pui Li, Rozalia during the period from September 22, 1999 to October 4, 1999 (both dates inclusive);

(b) in the event of there having been insider dealing as described in paragraph (a) above, the identity of each and every insider dealer; and

The tribunal under the Chairmanship of the Honourable Mr Justice McMahon completed its inquiry in respect of liability, that is to identify those persons who did or did not commit acts of insider dealing, and submitted a report in that regard to the Financial Secretary on November 10, 2004.

The company

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Dharmala Holdings was listed on the Stock Exchange of Hong Kong Limited (SEHK) on October 15, 1993. Its core business was the sale and distribution of industrial products and equipment. By late 1998 it had changed its name to Chinney Alliance Group Limited (Chinney) with its controlling structure comprising Chinney Investments Limited (Chinney Investments), Chinney Holdings Limited and Multi-Investment Group Limited (Multi-Investment).

In September 1999, the board of Chinney wished to obtain a capital injection by way of a direct placement of new shares (the direct placement), equivalent to about 20% of its then issued capital, to independent third parties subject to a proviso that a proportionate number of the new shares were to be subscribed for by Multi-Investment at the same placing price.

Chinney informed the SEHK of the proposal and trading in Chinney shares was suspended at the commencement of trading on September 23, 1999. However, SEHK informed the board of Chinney later on the same day that the subscription by Multi-Investment would in its view be a connected transaction and as such would require the approval of independent shareholders.

The board of Chinney then decided to not proceed with their plans relating to the direct placement and a notice to that effect was published in the Hong Kong press on September 24, 1999. Trading in Chinney shares was also resumed at 10:00 am on September 24,1999.

During the trading on September 24, 1999, the price of Chinney shares rose to $0.20, some 60% from its previous close of $0.12 on September 22, 1999. On the same day, members of the board of Chinney and its related companies Chinney Investments and Multi-Investment were informed that two placees were interested in resuming the placement of Chinney's shares on a "top-up" basis.

One of those potential placees was a Mr Bernard Pouliot (Mr Pouliot) who had previously been the managing director of Dharmala Holdings Limited until he had resigned on September 15, 1998. The other potential placee was Mr Richard Siemens (Mr Siemens) through his and his wife's company Goldstone Trading limited (Goldstone).

Mr Pouliot and Mr Siemens were both directors and shareholders of Distacom Communications Limited (Distacom) which was a privately owned company involved in the telecommunications industry. One of its interests was a 60% indirect shareholding in a well-known mobile telephone company (trading as "Sunday"), which operated a mobile telephone network in Hong Kong. Particularly Mr Siemens' connection with Sunday had been widely reported and was well known in business circles in Hong Kong.

Mr Pouliot had first expressed some form of interest in the then proposed Chinney placement on September 23, 1999. He had expressed this interest to Mr Kenneth Lam Kin Hing (Mr Lam) who was a director of Chinney and the managing director of its sometimes placing agent APC Securities Company Limited (APC). When the direct placement proposal was aborted Mr Pouliot remained interested.

This was taken further on September 24, 1999 and a meeting was held about mid-day amongst Mr Pouliot, Mr Lam and the chairman of Chinney Dr James Wong Sai Wing (Dr Wong). At that meeting the placement size of about 200 million shares was discussed and Mr Pouliot informed the others that Mr Siemens was a potential placee.

After that meeting, a follow-up meeting was held in the afternoon of the same day at which Mr Yu Sek Kee, Stephen (Mr Yu) a director and the chief financial officer of Chinney was present together with Mr Lam who represented the interests of Mr Pouliot and Mr Siemens. Mr Lau Chung Yin, Joseph (Joseph Lau), the corporate finance director of Chinney Investments and director of Multi-Investment also attended the meeting. The meeting initially went from some time after 2:30 pm to about 3:30 pm.

During the meeting Mr Lam disclosed to the others present that Mr Pouliot and Mr Siemens were now proposed placees, and a discussion ensued concerning, inter alia, the price and size of the placement. Prior to 3:30 pm the general terms of the placement had been effectively agreed between Mr Yu, who represented Chinney and Mr Lam for the placees. Accordingly at about 3:30 pm the SEHK was formally notified and trading in Chinney's shares was once again suspended.

Joseph Lau was on the morning of September 24, 1999 an existing Chinney shareholder. Between noon and 2:48 pm on September 24, 1999, he had sold some 2.95 million Chinney shares which he had previously purchased on September 22, 1999 and the morning of September 24, 1999. That sale exhausted his holding of Chinney shares and occurred prior to his attending the afternoon meeting held on September 24, 1999. During or after the meeting between 3:17 pm and 3:30 pm Joseph Lau placed orders for the purchase of a total of 6 million Chinney shares at an average price of about $0.20. In other words, the orders he placed to effect the purchases of 6 million Chinney shares were placed either during the course of or immediately after the meeting he attended where the parties succeeded in arriving at an agreement in principle as to the placement of Chinney shares in favour of Mr Pouliot and Mr Siemens.

On September 24, 1999 at around 10:00 am, a friend of Joseph Lau, Ms Pui Li, Rozalia, purchased some 750,000 Chinney shares.

On September 30, 1999, Chinney publicly announced the terms of the "top-up" placement agreement and trading in Chinney shares resumed at 10:00 am that day. Its closing price on that day was $0.42, a 106% increase on its closing price on September 24, 1999 of $0.20.

It was alleged that before the announcement of the "top-up" placement of shares, some parties had taken advantage of the relevant information they possessed to deal, counsel or procure another person(s) to deal in Chinney shares, thus constituting insider dealing.

Findings

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The tribunal concluded its findings by unanimous decision as follows -

Mr Lau Chung Yin, Joseph (Mr Joseph Lau)

Mr Joseph Lau was at all relevant times a director of corporate finance of Chinney Investments and an executive director of its 100%-owned subsidiary Multi-Investment which in turn held a substantial part of Chinney's shares, about 15% on September 22, 1999. Mr Joseph Lau was found to be an insider dealer in breach of section 9(1)(a) (Note) of the SIDO in respect of all Chinney share purchases, amounting to 6 million shares, undertaken by him on his own behalf on the afternoon of September 24, 1999 between 3:17 pm and 3:30 pm.

The tribunal made no finding of insider dealing against the other person named in the notice issued on September 25, 2002.

The tribunal will proceed to hear representations on a date to be fixed to determine the amount of profit gained or loss avoided and thereafter to make consequential orders and penalties.

Note: Section 9(1)(a) of the SIDO states that insider dealing in relation to a listed corporation takes place when a person connected with that corporation who is in possession of information which he knows is relevant information in relation to that corporation deals in any listed securities of that corporation or their derivatives (or in the listed securities of a related corporation or their derivatives) or counsels or procures another person to deal in such listed securities knowing or having reasonable cause to believe that such person would deal in them.

Ends/Wednesday, December 15, 2004

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