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Compensation for CITIC investors unlikely: Academics

By Teddy Ng (China Daily)
Updated: 2008-10-27 09:16

Eric Chung, a 63-year-old retiree, and his 28-year-old son always wanted to make some money from the stock market. They believed investing in blue chip enterprises was a sound decision that could generate stable income. But recently they lost a lot of money investing in Citic Pacific. They said they made the investment decision based on insufficient information.

The father had been investing in the property-to-steel conglomerate for a long time. He bought 5,000 units of the company's shares on September 10 for about HK$120,000, on top the 20,000 units he purchased long before. His son bought about 4,000 units on October 17, costing HK$60,000.

The family's dream of getting a return was dashed Monday, when the company's share price plunged significantly after it had lost HK$15.5 billion in unauthorized currency trading.

"It was so sudden," the father said. "My loss may be insignificant to the rich people, but it is very significant to me."

The family was furious when they heard that the company had been sitting on the news about the loss since September 7.

"If I knew about the loss, I and my son would not have bought the shares," the father said. "I cannot understand why the company did not disclose the information for such a long time. We were misled," he said.

He has filed a complaint with a legislator in hopes of getting some of the investment back.

"No words can describe how I feel now," he said.

The Securities and Futures Commission (SFC) has launched an investigation into the incident, raising hopes that individual investors may use the investigation result to launch civil lawsuits to seek damages.

But Douglas Arner, associate professor of law at the University of Hong Kong, said legal action initiated by individual investors is unlikely even though there is a provision under the law that allows individuals to sue a company for failure to disclose key information.

It is also difficult for individual investors to initiate collective legal actions, he added.

"The procedural rules do not provide a good way to do it," he said. "The court can decide to group the investors together if the facts are sufficiently similar. But the investors probably have purchased the stocks under different circumstances and at different times. The court is likely to decide to handle each case separately, which is going to be expensive."

The best hope for individual investors is to wait for the SFC to take action and for the company's business to get back on track.

City University of Hong Kong associate professor of economics and finance Charles Li said taking collective action may not be conducive to the investors' interests.

"The chaos may intensify and the share price of the company may plunge further," he said.

The investors may not necessarily get their damages back, both professors said.

Arner suggested changes be made to the legal system in Hong Kong so as to facilitate collective legal action, which is popular in the United States where it is called "class action".

"A company is required to disclose information about the company to the public in a timely manner. . If they don't, they will be penalized by regulators and be held responsible by individual investors," he said.