(Bloomberg Opinion) -- There’s closing the stable door after the horse has bolted. And then there’s half-closing the door after the horse has galloped over the horizon, fallen badly, been dragged to the slaughterhouse yard, and shot. The Hong Kong stock exchange’s enforcement action against Tech Pro Technology Development Ltd. — one of the more celebrated corporate debacles of recent years — falls more into the latter category.
The maker of LED lights and sometime sub-lessor of property in Shanghai was censured on May 26 along with seven former directors — more than a year after the company was delisted, four years after the market regulator ordered trading in its shares to be suspended, and close to six years after an investor first raised concerns about the stock. Any shareholder who held since the start of that period, when Tech Pro had a market value of about $1.6 billion, has lost everything. For this, five directors will have to attend 24 hours of training on regulatory and legal topics in order to serve on any board in future, according to Wednesday’s statement from Hong Kong Exchanges & Clearing Ltd. It’s hardly a penalty to strike fear into future potential transgressors.
Tech Pro had more red flags than a Communist Party rally in Tiananmen Square. To name just a few:
- A 2015 bubble warning from independent commentator David Webb;
- Unusual trading patterns in its stock;
- A 2016 short-seller report that called the company a fraud and gave it a target price of zero;
- An asset freeze and bankruptcy petition against the chairman;
- The purchase of a soccer club;
- The use of “tech” not once but twice in its name.
In the go-go days of early 2016, Tech Pro was trading at more than 60 times sales, despite having posted annual losses every year since 2010. For comparison, Tesla Inc., that beaten-down value stock run by the self-effacing Elon Musk, trades at a mere 16 times.
Glaucus Research Group punctured the bubble in July 2016 with a report that detailed discrepancies between what Tech Pro said it had paid for and was earning on a subleasing joint venture in Shanghai, and what State Administration of Industry and Commerce filings showed. The stock fell 94% in two days. The company mounted a furious defense, declaring the Glaucus report “incomplete, biasedly-selected and presented and materially misleading.” The shares didn’t recover.
The HKEX statement tells a somewhat simpler story. The essential problem with the Shanghai joint venture seems to have been that Tech Pro’s JV partner kept all the money. That was bad enough, but the partner (which the statement doesn’t identify ) didn’t pay rents due to the property’s owner either. It’s not the best idea to be in arrears to the logistics department of the People’s Chinese Armed Police Force, Corps of Shanghai (the owner, according to an earlier statement by Tech Pro). The department sued the venture, and as a result, it lost its subleasing rights to the property.
The Securities and Futures Commission ordered trading in Tech Pro shares to be suspended in November 2017 when it became aware that the venture had lost these rights and the listed company hadn’t disclosed this in its interim results. Tech Pro claimed ignorance: “The Company and the Directors did not have knowledge about the Lawsuit prior to receiving the letter from the SFC,” it said in a filing dated Nov. 9, 2017. The company had entrusted its JV partner with daily operations and directors “truly” believed the partner had paid the rent through 2024, it said.
What did they know about their Shanghai business? Precious little, it would appear. Even though the company had requested on several occasions to participate in the operations of the JV, the partner “insisted that he would manage and have full control,” according to the HKEX statement.
The exchange is unsparing in its judgment. Directors “failed to take appropriate steps to protect and monitor the issuer’s investment” in the joint venture and placed too much reliance and trust on the partner to run the business. Their inaction created an environment for irregularities, which went undetected and resulted in the loss of a substantial asset in the subleasing rights. The exchange views their “failure to exercise reasonable care, skill and diligence seriously and will take enforcement action without hesitation.” It censured the directors for failing to implement effective risk management and internal control procedures. (Tech Pro didn’t respond to two emails seeking comment; calls to a phone number listed on its website were unanswered.)
As is usual in such cases, “without hesitation” has arrived far too late to help investors. The penalties, meanwhile, only underscore the inadequacy of the HKEX sanctions arsenal. “The exchange has always been a toothless tiger,” Webb said in an email. He argues that its regulatory role should be transferred to the SFC and backed by statutory enforcement powers. “24 hours of director-education if they ever come back to the market is hardly a deterrent.”
"When a company includes the syllable "Tech" in its name twice, you know it is desperate for attention," as Webb wrote in 2015.
A Dec. 17, 2018, statement from Tech Pro identifies the JV partner asFan Lin, described as a PRC individual.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew Brooker is a columnist and editor with Bloomberg Opinion. He previously was a columnist, editor and bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.
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