The August 20, 2026 sentencing of Hui Ka Yan, the founder of Evergrande Real Estate Group Ltd. (“Evergrande”), to life in prison for a financial fraud that culminated in Evergrande’s default in 2021 on over US$42bn in liabilities begs a question that Hong Kong lawmakers and regulators need to answer. Given the scale of the fraud, why did the Market Misconduct Tribunal find Andrew Left liable for disclosure of false or misleading information when he published his explosive report in 2012 alleging that Evergrande was “insolvent” and “presented fraudulent information”?
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June 21, 2012. Citron Research, the name for the activist short selling business of Andrew Left, published a report alleging Evergrande, the largest property developer in the PRC, was overstating income and assets and, contrary to public perception, was “insolvent” and “would be severely challenged from a liquidity perspective”. The report foreshadowed “Whether it be the capital markets, government enforcement, hard or soft landing, the endgame for Evergrande is a certainty; the only uncertainty is the timing”. In hindsight, the report was prescient.
On the day of the publication of the report, the price of Evergrande shares closed down almost 20% from the prior close.
Evergrande denied the allegations in the report. A chorus of research analysts at a number of banks criticized the report.
On December 15, 2014, the Securities and Futures Commission (”SFC”) directed the Market Misconduct Tribunal (“MMT”) to determine whether, in publishing his report, Andrew Left had been guilty of the disclosure of false or misleading. Andrew Left retained us to defend him.
Regrettably, on August 26, 2016, the MMT found Andrew Left culpable of disclosing false or misleading information.
On June 24, 2022, 6 years after Andrew Left’s report, a creditor of Evergrande petitioned for its winding-up. A Hong Kong court ordered Evergrande to be wound-up on January 29, 2024. At the time of the petition, Evergrande had liabilities exceeding US$42 billion.
Did Evergrande’s fraud and insolvency arise after Andrew Left’s report or was it always engaged in fraud and insolvent as Andrew Left had alleged?
We know that PwC acted as auditors for Evergrande from its listing in 2009 until early 2023. We know that the Accounting and Financial Reporting Council (“AFRC”) fined PwC HK$300mn and imposed a 6 month practice limitation on PwC for serious deficiencies in its audits of Evergrande for the 2019 and 2020 financial years on the basis that these deficiencies contributed to premature revenue recognition, inflation of profits and liquidity and material misstatements in property assets. These were the same allegations Andrew Left had made in his report.
Refusal to Look Beyond Audited Financial Statements
The Securities and Futures Ordinance (“SFO”), s. 277(1) states:
to induce another person to subscribe for securities, or deal in futures contracts, in Hong Kong;
to induce the sale or purchase in Hong Kong of securities by another person; or
to maintain, increase, reduce or stabilize the price of securities, or the price for dealings in futures contracts, in Hong Kong,
if — the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact; and
the person knows that, or is reckless or negligent as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact.
As can be seen, s. 277(1) focuses on whether information is “false or misleading as to a material fact”. In alleging Evergrande was insolvent and had presented fraudulent information, it might reasonably be thought that the section would require an enquiry into whether Evergrande was or was not solvent and whether Evergrande had or had nor presented fraudulent information.
Surprisingly, even though the stated goal of the MMT was to determine whether Andrew Left’s report disclosed false or misleading information contrary to s. 277, it never undertook any enquiry into the true financial position of Evergrande.
At the outset of the MMT proceedings, as counsel for Andrew Left, we specifically requested discovery of information for the purpose of such an enquiry.
No Enquiry of Underlying Financial Situation
In its ruling dated October 27, 2015, the MMT summarized our discovery request, stating:
We justified the discovery request on the basis that where fraud and insolvency are alleged, the allegation necessarily implies that the audited financial statements are false or misleading and the only means to determine if that implication is true or not is to look into the underlying books and records of the company. The MMT summarized our argument thus:
The MMT refused discovery. The MMT took the view that because the SFC presented its case on the basis of public information, its work should be confined to public information. The MMT stated:
No Denial of Opportunity to be Right
We returned to the issue of the underlying financial position of Evergrande at the conclusion of the MMT proceedings, arguing that the failure to afford Andrew Left discovery meant that he had been deprived of the opportunity to defend on the basis that his conclusion, however his reasoning may be challenged or flawed, was ultimately correct. The MMT summarized the argument in its final report dated August 26, 2016 as follows:
We suggested that a finding by the MMT that Andrew Left was culpable of disclosing false or misleading information was tantamount to a finding that Evergrande’s accounts were genuine.
The MMT again rejected the argument, stating:
In essence, the MMT sought to judge whether Andrew Left’s report was false or misleading by reference to public information even though the report itself was challenging that very public information.
The MMT rulings refusing discovery and denying that Andrew Left had been denied an opportunity to be heard on the issue of the truthfulness of his report remained undisturbed through the appeal process all the way up to the Court of Final Appeal.
Appropriate Enquiry for Disclosure of False Information
No doubt, the MMT had a legitimate concern as to both imposing on a listed company a massive discovery burden and invading the commercial and financial privacy of the company merely because it was the subject of an investment research report which the SFC was challenging on the basis that it disclosed false or misleading information.
Nevertheless, was it fair or just for an investment analyst, such as Andrew Left, not only to be found culpable of disclosing false or misleading information but also to have been denied the chance of establishing what he said was true when there is a strong basis in hindsight to conclude that what he was saying was true?
