Disclosure of False or Misleading Information Inducing Transactions

SFO has defined 6 types of market misconduct offences. What we have frequently heard are insider dealing, false trading and price rigging. Until recently there is the first criminal prosecution of another kind of market conduct called "disclosure of false or misleading information inducing transactions".

SFC has commenced criminal proceedings against David Vong Tat Ieong, CEO of Vongroup Ltd (318.hk), alleging that he disclosed or was concerned in the disclosure of false or misleading information issued by Vongroup, which was likely to induce transactions in the shares of Vongroup or maintain or increase its share price. The case may be prosecuted by the Department of Justice as an indictable prosecution.

On 15 May 2007, Vongroup issued an announcement to SEHK and a press release disclosing that Vongroup Holdings Ltd, a company wholly owned by Vong through which he held 72% of the issued share capital of Vongroup, was selling a 9.9% stake in Vongroup to ABN AMRO Bank. The share price of Vongroup rose 31.25% on the following day. However, unknown to the investing public, Vong is alleged to have simultaneously executed two additional agreements with ABN AMRO. Under the first agreement, ABN AMRO secured the right to sell the shares back to Vongroup Holdings Ltd at the same price within three years. Under the second agreement, the proceeds were retained in an escrow account pending either ABN AMRO selling the shares to an independent third party or the expiry of the put option.

SFC alleges that the announcement on 15 May 2007 was false or misleading because it omitted the existence of the two additional agreements. In effect, the announcement failed to properly disclose the whole transaction and the investing public were likely to have been misled into believing ABN AMRO had decided to support Vongroup in buying 9.9% of the issued share capital when, effectively, the deal did not expose ABN AMRO to the same investment risks as other shareholders and was a virtually risk-free one.

SFC further alleges that (i) Vong knew that the announcement, which was likely to induce the investing public to purchase shares in Vongroup or maintain or increase the market price of Vongroup shares, was false or misleading because, to his awareness, the two additional agreements were not disclosed or (ii) he was reckless as to whether that would be the case.

If SFC won this case, I think those directors of Hong Kong listed companies would have one more nightmare. I am also interested to know if ABN AMRO would be implicated in this case.