GEM Sponsor

Last week SFC announced that it SFC has "resolved" a number of compliance issues with Core Pacific-Yamaichi Capital Limited (CPYC), Core Pacific-Yamaichi International (H.K.) Limited (CPYI) and Core Pacific-Yamaichi Securities (H.K.) Limited (CPYS).

What has been resolved?

• SFC fines CPYI, CPYC and CPYS $3.3m, $2.8m and $350,000 respectively.
• SFC reprimands CPYI and CPYS.
• CPYC will engage an independent audit firm to conduct a review of two sponsorship transactions completed by it within three years of the agreement, but the review timing and the transactions will be selected by SFC.
• If CPYC is found to have committed failures or breaches materially similar within the three-year period then CPYC's business in sponsorship activities will be suspended for at least 18 months.
• CPYC accepts the disciplinary action without admitting liability.

The CPY group and the South China group have faced the similar fate!

What's wrong with CPYC, CPYI and CPYS?

CPYC

SFC's allegations concern CPYC's role as sole sponsor and continuing sponsor of Tungda Innovative Lighting Holdings Ltd (Tungda). Tungda was listed on GEM on 26 Jul 2002. CPYC ceased to act as Tungda's continuing sponsor on 10 Oct 2003. Trading of Tungda's shares has been suspended since 29 Jul 2004 at the request of the company.

In particular, SFC alleged that CPYC failed to:

• conduct adequate due diligence on Tungda's top customers and sales;
• ensure that its responses to HKEx's enquiries about over-statement of Tungda's sales in its listing prospectus were complete and not misleading;
• report irregularities it had detected about Tungda's sales to HKEx; and
• diligently supervise persons employed by it to carry out the Tungda sponsorship.

The amount of the fine represents the fee earned by CPYC in acting as sponsor and continuing sponsor of Tungda.

CPYI

SFC's concerns about CPYI's conduct stemmed from CPYI's role as lead underwriter in the listing of Shaanxi Northwest New Technology Industry Limited (SNNT). SNNT was listed on GEM on 3 July 2003.

SFC found that CPYI caused the level of demand for the new shares to be misrepresented by:

• offering high margin facilities to employees of SNNT who had insufficient financial means to support their subscriptions;
• allowing CPYI employees to subscribe for the shares without properly disclosing or obtaining the consent of HKEx as required; and
• causing SNNT to announce to the market an inaccurate over-subscription rate and public float of its shares.

CPYS

SFC found that CPYS's internal control deficiencies directly contributed to its failing to:

• detect and remedy misconduct by staff members who issued false statements of account to clients to cover up unauthorised trading; and
• ensure it had adequate systems to verify the accuracy of its FRR returns.

In my very extreme opinion, GEM is a hotbed of sub-standard issuers and sponsors.