Corporate Governance CITIC Pacific

On 20 October 2008, Citic Pacific disclosed that it had incurred losses of HK$15.5 billion from using currency accumulators to hedge against a rise in the Australian dollar. Citic Pacific directors and management are being heavily criticized for not disclosing the losses earlier when they had known of the problem at least 6 weeks before the public announcement.

Company shares fell 42 percent between Sept 7, when the board learned of the company's exposure to risk, and Oct 20. Hong Kong's benchmark Hang Seng Index dropped 23 percent over the same period.

The red-chip group purchased equipment and supplies in Australian dollars and euros. To help fund the mining endeavor, group finance director Leslie Chang signed derivative contracts that stood to profit the company, as long as the US dollar grew weaker against the Australian currency.

When the financial crisis exerted a downward pressure on commodities prices last summer the Australian dollar fell sharply against the US dollar. The resulting loss may be the biggest derivatives loss ever reported by a Chinese company.
As a result of the losses, Citic Group had to step in to save the company from going under. Shareholders of Citic Pacific have now approved the issue to the parent Citic Group of US$1.5 billion in convertible bonds which on conversion will give the parent company majority control with 57.6% (up from 29.4%) diluting management shareholder Larry Yung.

According to a statement to the Stock Exchange, Citic Pacific revealed that its entire board of directors was being investigated by the SFC over the incident. Those under the investigation included Citic Pacific Chairman Larry Yung, Citic
Pacific Managing Director Henry Fan and 15 other directors of the
company, while Yung’s daughter, Frances Yung, former group finance
director Leslie Chang and former financial controller Chau Chi-yin were
not on the investigation list, papers reported.

Citic Pacific’s disclosure that all its directors were subject to the SFC’s investigation was made to comply with amendments to the Listing Rules that went into effect on 1 January. The amendments require continuous and timely disclosure by listed companies of information concerning directors who are subject to any investigation, hearing or proceeding by any securities regulatory
authority, or any judicial proceeding in which a violation of any securities
law or regulation is alleged. Many listed companies made similar announcements on Friday to comply with the amended rules since some of their board members were also Citic Pacific directors.