Chairman and founder Larry Yung and managing director Henry Fan of Hong Kong's diverdified business conglomerate Citic Pacific, controlled by China's biggest state-owned investment company Citic, have resigned after Hong Kong police raided their office in search of evidence for fraud and false statements.
Last October, Citic Pacific said that it could lose nearly $2 billion from badly-timed currency bets after entering into currency hedges to buy the Australian dollar and the euro, which were intended to minimise its currency exposure to an iron ore mining project in Western Australia. (See: Citic's HK arm loses $2 billion in ill-timed currency bets)
The Commercial Crimes Bureau of Hong Kong issued a search warrant on 3 April and raided the company's headquarters overlooking Hong Kong's Victoria Harbour, where Citic Pacific and its directors were asked to provide information regarding currency contracts, false statements made by company directors and / or conspiracy to defraud under the common law.
Trading in the Hong Kong-listed shares of CITIC Pacific has been suspended since last Friday, 3 April, following the police raid.
The news of losses triggered protests from shareholders since the company did not disclose these losses for six weeks before informing the market, which led to separate investigations from the Hong Kong securities regulators and police.
Larry Yung had said at that time that ''These contracts were done without proper authorisation and the potential maximum exposure under these contracts was not evaluated correctly,'' and the blame was put on Leslie Chang, group finance director, and Chau Chi-yin, financial controller, who then resigned.
But industry experts refused to believe that Leslie Chang, a highly reputed and responsible executive with years of experience could have executed the bets as Larry Yung exercised tight control over the company.
Yung's daughter, Frances, the group finance director, was demoted with a salary cut following the discovery of the losses.
Citic Pacific invests nearly $600 million a year in Australian dollars to expand the Sino iron project, a mine in Western Australia's Pilbara region, to supply iron ore for its steel mills in mainland China. It has an 80-per cent stake in the Australian mine with the remaining 20 per cent held by the China Metallurgical Group.
In March, the company raised the capital expenditure requirement for this mine by 40 per cent to $3.5 billion, due to the appreciation of the Australian dollar.
The transactions were connected to the purchase of equipment and materials for the Sino iron ore project and it was linked in Australian dollars and euros, the currency bets were placed with the aim of fixing costs.
Officers of the Crime Bureau, who raided the company, removed boxes of documents from the office but did not make any arrests.
The company said in a statement to the Hong Kong stock exchange saying, "Mr. Yung believed that his resignation would be in the best interests of the company," and he was replaced by Chang Zhenming, the acting group deputy chairman and president.
Although born in mainland China, Yung made his wealth after settling in Hong Kong in 1978 and was once the richest man in China with Forbes magazine putting his estimated worth at $3.7 billion in 2007.
Coming from a wealthy business family, he was the son of former Chinese vice president Rong Yiren, who had been nicknamed as China's ''red capitalist'', while the son Hong Kong's ''red tycoon.''
Yung took over his fathers business empire and developed it further by entering power generation, infrastructure, property, steel mills as well as acquiring a 22 per cent stake in Hong Kong's airline, Cathay Pacific
He founded Citic Pacific in 1986 with $30 million from Citic Group and the company reported its first loss in years with a net loss of $1.6 billion for 2008.
Following the disastrous losses, Citic Pacific's parent company, China's state-owned Citic Group, bailed out Citic Pacific by infusing $1.5 billion and doubled its stake to about 57 per cent while reducing Yung's and other shareholder's stake to 19 per cent.