The Securities and Futures Commission (SFC) commenced Market Misconduct Tribunal (MMT) proceedings in late March 2016 against Yorkey Optical International (Cayman) Limited (Yorkey), its CEO/Executive Director and Financial Controller/Company Secretary for late disclosure of inside information. This is the third set of MMT proceedings brought against listed companies and their officers for breach of the disclosure requirement under Part XIVA of the Securities and Futures Ordinance (SFO).

This case highlights the importance of timely disclosure of profit warnings. When officers of a listed company receive internal management accounts which show significant deterioration in its financial performance, they should ensure that the listed company discloses information about the deterioration to the public as soon as reasonably practicable.

Background facts

  • On 16 August 2012, Yorkey stated in its interim results announcement for the first half of 2012 that it expected that “its results for the second half of the year will see significant growth over that in the first half of the year, alongside with increasing profitability”.
  • On 25 March 2013, Yorkey announced its annual results for 2012 which recorded a net profit of US$60,000 for the full year of 2012, which represented a substantial decline as compared against its 2011 results (US$6.685 million) and against its results in the first half of 2012 (US$1.25 million). The net profit for 2012 represented a decline of 99% when compared to the net profit in 2011. Compared to the first half of 2012, Yorkey’s revenue decreased by 5.9% and gross profit margin dropped from approximately 21.2% to 18.2%.
  • The share price of Yorkey fell 21.25% over a three-day period from HK$0.80 on 25 March 2013 to HK$0.63 on 28 March 2013.
  • Between the 2012 interim results and 2012 final results, Yorkey did not issue any profit warning announcement.

SFC’s allegations

  • The information about Yorkey’s material losses in the second half of 2012 and the significant deterioration in its financial performance were apparent from the figures contained in the internal management accounts for the last three months in 2012 provided to Nagai Michio (CEO and Executive Director), and also from the draft financial statement prepared by Yorkey’s auditors which was provided to Ng Chi Ching (Financial Controller/Company Secretary) in late February 2013.
  • The monthly results for the five months between July and November 2012 were already sufficiently poor for it to have been a clear indication to management that the results for the second half of 2012 (and hence also the full year of 2012) would be much worse than expected.
  • The SFC alleged that the information about the deterioration, as shown by the internal management accounts, was inside information in relation to Yorkey, and that such information came to the knowledge of Yorkey from around mid-December 2012 (when the internal management accounts up to November 2012 had, or ought reasonably to have, come to the knowledge of Michio) or mid-January 2013 at the latest (when the internal management accounts for December 2012 and for the full year of 2012) had, or ought reasonably to have, come to the knowledge of Michio). However, it was not disclosed to the public until the publication of Yorkey’s annual results for 2012 on 25 March 2013.The SFC therefore alleged that Yorkey was, or may have been, in breach of the disclosure requirement under Part XIVA of the SFO.
  • The SFC also alleged that Michio and Ng, as officers of Yorkey, were, or may have been, in breach of the disclosure requirement under Part XIVA of the SFO because (a) they failed to take any steps to ensure timely disclosure of information about the deterioration to the public and such failure amounted to reckless or negligent conduct which resulted in, or may have resulted in, Yorkey’s breach, and (b) they failed to take reasonable measures to ensure that proper safeguards exist to prevent a breach of a disclosure requirement by Yorkey.

SFC’s Notice commencing the MMT proceedings dated 29 March 2016 can be accessed via the link below:

http://www.mmt.gov.hk/eng/rulings/Yorkey_ruling_06042016_e.pdf

Please refer to our earlier client alert for a brief account of the two earlier sets of MMT proceedings commenced by the SFC against two other listed companies for late disclosure of inside information.