Summary of First Preliminary Ruling Before MMT Proceedings Against Activist Short Seller Andrew Left
For Immediate Release. October 27, 2015.
October 27, 2015. Hong Kong – Timothy Loh LLP represents activist short seller Andrew Left as firm client applies to the Market Misconduct Tribunal (MMT) that Evergrande be required to produce to the MMT documents and records in its possession to facilitate an enquiry into its true financial position. However, the Securities and Futures Commission (SFC) opposed the application based on the argument that because the documents and records sought were spread across the Mainland in numerous repositories, it would be “a mammoth task” to make them available and study them.
The SFC also took the opportunity to “clarify” its case by limiting it to the assertion that Mr. Left created false or misleading information out of what was publicly known about Evergrande at time he posted the Report, hence arguing that the substantive matter to be determined by the MMT did not depend on ascertaining Evergrande’s true financial position.
Such “clarification” (i) was fundamentally different from the original SFC Case which Mr. Left was put to answer, and (ii) had the effect of avoiding the need to prove (and the SFC did not ultimately prove) whether Evergrande was in fact solvent and that it had not in fact engaged in fraud. On October 27, 2015, the MMT accepted the SFC’s arguments and dismissed Mr. Left’s application.
Managing Partner of the firm, Timothy Loh, states, “We do not agree that the SFC need not prove actual insolvency and fraud as the legislation aims at false facts rather than incorrect opinions. As such, the firm intends to take up the matter on appeal.”
Andrew Left and Evergrande
On June 21, 2012, Mr. Andrew Left (“Mr. Left”), a private investor based in the United States, posted an analytical report (“Report”) on Citron Research (https://citronresearch.com/), an online stock commentary website led by him. In the Report, Mr. Left expressed his opinion that Evergrande Real Estate Group Ltd (stock code: 3333) (“Evergrande”), a company in the PRC property sector and listed on the Stock Exchange of Hong Kong, was insolvent and had consistently presented fraudulent information to the investing public. The Report comprehensively detailed the evidence and analysis Mr. Left relied upon in reaching his opinion.
In December 2014, the Securities and Futures Commission (“SFC”) commenced proceedings against Mr. Left before the Market Misconduct Tribunal (“MMT”). The SFC alleged that Mr. Left, through his Report, had disseminated false or misleading information to the market contrary to s. 277 of the Securities and Futures Ordinance in that Evergrande was not insolvent and had not consistently presented fraudulent information (“SFC Case”).
Application to Enquire into Evergrande’s True Financial Position
On the basis of the SFC Case, the central issue for determination by the MMT would be whether, contrary to Mr. Left’s opinion in the Report, Evergrande was in fact solvent and that it had not in fact engaged in fraud. This would require looking beyond the audited financial statements published by Evergrande into its primary documents, as fraudulent activities could be hidden from auditors, thus rending audited statements inconclusive as to the actual solvency status of Evergrande and whether or not it had engaged in fraud as a matter of fact. Therefore, in September 2015, Mr. Left applied to the MMT for an order that Evergrande be required to produce to the MMT documents and records in its possession to facilitate an enquiry into its true financial position.