The Market Misconduct Tribunal (“MMT”) recently disagreed with the Securities and Futures Commission, holding that an executive director and a number of non-executive directors did not commit the market misconduct of dissemination of false or misleading information.
In its report, issued on 29 December 2016, the MMT came to different conclusions for each Specified Person, with its findings of culpability for negligence or recklessness not necessarily dependent upon actual knowledge of the fraud in each case.
The allegations of culpability were based on accounting fraud over the course of the financial years 2000–2004 that took place within subsidiaries of Greencool Technology Holdings Limited (“Greencool”). Greencool was delisted from the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong in 2007.
The fraud involved a number of Greencool’s subsidiaries creating fictitious business projects and income, with separate books of account kept in the Mainland under the control of a core group of senior directors and employees to conceal the true state of financial affairs from external auditors, who expressed unqualified opinions that the Greencool Group’s accounts gave a true and fair view of its finances in the financial years 2000–2004.
The Individual Findings
The MMT found that the executive director who did not have actual knowledge, Mr. Chen, had failed to act as a reasonably diligent director would have acted and failed to act as a person of his experience but that his negligence did not constitute a ground of culpability. Although he made no effort to understand the Group accounts when signing them, he often visited the subsidiaries to discuss business matters but nothing came to his attention or caused him to suspect that there had been fraudulent overstating of assets or non-disclosure of liabilities. When he signed the accounts, Mr. Chen relied on the audit and approval of the accounts by Greencool’s Audit Committee and had no reason to question their accuracy.
In contrast, the MMT found the Group Financial Controller, Mr. Mok, who also did not have actual knowledge of the fraud, guilty of market misconduct – despite not being a director. As the most senior financial officer in the Greencool Group and the Group Qualified Accountant and Company Secretary, Mr. Mok was found to be negligent as to whether the accounts and final results of the Greencool Group were false or misleading. Though Mr. Mok had no access to the financial records of the subsidiaries and no ability to monitor the subsidiaries’ compliance with the appropriate financial standards, his role as the Group Financial Controller was to supervise the subsidiaries. Carried out properly, he may have picked up indications that all was not as it seemed to be, although it cannot be said that the fraud would have been uncovered.
The MMT reiterated that executive and non-executive directors have the same responsibility in law as to the management of the company’s business but in this case were satisfied that the non-executive directors were not culpable, as they had exercised reasonable diligence and were unable to unearth information undermining the integrity of the Greencool Group’s accounts.
This report is a useful reminder that executive and non-executive directors are held to the same standard in respect of the management of a company. Accordingly, even as a non-executive director who does not manage the day-to-day affairs of a company, it is important to always have a questioning mind.
The standard to which an individual is held in the context of whether or not he or she is negligent or reckless will depend on his or her role in the company or group of companies. As seen in this case, a senior financial officer who was not a director but was responsible for ensuring the financial integrity of the accounts, was held to a higher standard than a director.