Charges were laid against Cho Kwai Chee, a former director of Convoy Global Holdings, one of the companies said to be at the centre of the so-called ‘enigma network’.
Hong Kong’s ICAC (Independent Commission Against Corruption) has charged a former director of a listed financial advisory firm, Convoy Global Holdings, with conspiracy to defraud the SEHK (Stock Exchange of Hong Kong) and the directors and shareholders of Convoy.
The case relates to the so-called ‘enigma network’, a group of closely linked publicly traded companies that witnessed simultaneous falls in their share prices in June 2017, prompting a regulatory crackdown.
Indeed, the SFC (Securities and Futures Commission) has highlighted such ‘nefarious networks’ as one of the key challenges facing Hong Kong’s capital market. In October 2018, SFC executive director for enforcement Thomas Atkinson said the regulator had already halted trading in companies, frozen ill-gotten gains, and conducted multiple large-scale search operations against several of these networks, some involving hundreds of entities and individual targets.
David Webb, the former investment banker and shareholder activist who coined the term ‘enigma network’ in 2017, has shown in research that Convoy was one of the companies at the centre of the network, with at least eight other companies owning stakes in the group.
The ICAC charges, brought against former Convoy director Cho Kwai Chee in the Eastern Magistracy on Thursday (16 May), follow a joint operation mounted with the SFC in December 2017, where Convoy offices were raided, four people were arrested, and its stock was – and remains – suspended.
According to the ICAC, a joint investigation found that Cho exerted his “significant influence” over Convoy as a majority shareholder to have it acquire, through a wholly owned subsidiary, True Surplus International Investment, a company engaged in asset management business and which Cho also owned, for a total consideration of HKD 89 million (USD 11.3 million).
The charges allege that between April 2016 and December 2017, Cho conspired with two other (unnamed) persons to defraud the SEHK, as well as the board of directors, shareholders and investors of Convoy, by dishonestly:
- failing to disclose to SEHK that he was substantial shareholder of Convoy;
- failing to disclose to SEHK that he was a de facto or shadow director of Convoy;
- failing to disclose to both Convoy and SEHK that the acquisition of True Surplus was a connected transaction; and
- failing to convene the required company meetings or comply with SEHK rules in the True Surplus acquisition.
As a result of his actions, Cho received payments totalling over HKD 57 million for the acquisition, and was relieved from a further capital commitment of around HKD 16.2 million in relation to two True Surplus investment funds.
Cho has been granted bail of HKD 700,000 at the Eastern Magistracy and is due in court again on 24 July.
As Cho was not a disclosed shareholder of Convoy, the ICAC will need to prove his majority ownership by showing he was “pulling the strings of numerous listed companies in the network which held the stock,” David Webb said in a blog post. “Two co-conspirators are unnamed. We wait to see the rest of the iceberg.”
According to Bloomberg, citing lawsuits against Cho, companies connected to him allegedly bought and sold each other’s shares to artificially pump up prices, while diverting millions of dollars of investor money into their own pockets. The report also says Cho used Convoy to make margin loans to other businesses connected to him.
“The Cho network is now linked to tens of millions of dollars in unpaid loans, the suspension of trading in at least $22 billion worth of shares in Cho-related companies, numerous lawsuits and 13 arrests — with more likely to come,” the report said.