World Crisis Online

By Debra Mao

(Updates with inside dealing allegations in fourth paragraph.)

March 4 (Bloomberg) — China Forestry Holdings Ltd.’s former chief executive officer violated Hong Kong law and should face proceedings in the city, a lawyer for the Securities and Futures Commission told the High Court today.

Judge Andrew Chung extended a freeze on HK$398.2 million ($51.1 million) of Li Han Chun’s assets until trial or further order. Chung also gave the regulator permission to serve Li with a lawsuit, which seeks refunds for investors, in China.

“The SFC is prepared to prove the fact of contravention,” the watchdog’s lawyer Roger Beresford told the judge of the alleged breach in Hong Kong securities law. “There is restitution to be made in protection of innocent investors.”

Li was detained by police in China last month, China Forestry – partly owned by Washington-based private equity firm Carlyle Group – said in a Hong Kong stock exchange filing on March 2. Li and his personal company engaged in insider dealing when they sold 119 million shares of China Forestry through a share placement on Jan. 12, the SFC alleged in a statement today.

Beijing-based China Forestry disclosed potential accounting irregularities on Jan. 31 and Moody’s Investors Service put China Forestry’s debt on review for a downgrade after share trading was suspended on Jan. 26.

Credit Watch

The forestry operator said yesterday it has the resources to pay off all loans and expenses and to continue operations.

China Forestry’s financial strength remains “uncertain” even after yesterday’s statement, Standard & Poor’s Ratings Service said today in a report that reaffirmed it’s keeping the company on CreditWatch with negative implications.

“China Forestry is likely to have limited access to the capital markets,” Standard & Poor’s credit analyst Frank Lu wrote. “We need more information about the extent of the accounting irregularities” and must “further assess the sustainability of its operating model.”

Li, who wasn’t represented in the Hong Kong court today, was detained by police in China’s Guizhou province for the alleged embezzlement of 30 million yuan ($4.6 million), China Forestry said.

Beresford told the judge today the SFC would rely on mainland China authorities to deliver the papers to Li.

“One would hope they would not find difficulty in reaching a man in their custody,” Beresford said.

The case is Securities and Futures Commission and Li Han Chun, HCMP176/2011 in Hong Kong’s High Court of First Instance.

–With assistance from Shelley Smith in Hong Kong. Editors: Douglas Wong, Dirk Beveridge, Hwee Ann Tan