Caixin
Oct 21, 2019 08:52 PM
FINANCE

Everbright Securities’ Compliance Chief Quits as Dud Deal Fallout Spreads

Everbright Securities has so far punished eight employees over the MPS investment. Photo: IC Photo
Everbright Securities has so far punished eight employees over the MPS investment. Photo: IC Photo

The fallout from an ill-fated overseas acquisition continues to haunt state-owned Everbright Securities Co. Ltd. with the departure of another senior executive from the company.

The brokerage’s chief compliance officer, Chen Lan, has resigned due to “personal family reasons” the Hong Kong- and Shanghai-listed company said in an exchange filing on Friday night. The company’s Chairman Yan Jun will take over her duties until her replacement is appointed. Chen’s resignation was announced just two weeks after the brokerage’s executive president Zhou Jiannan stepped down.

Chen is a veteran of the securities industry. Before joining Everbright Securities in 2008, she served as a director of the legal department at the China Securities Regulatory Commission (CSRC), and a director of the CSRC Administrative Penalty Committee.

Everbright Securities has seen a string of senior executives depart since an investment in a now-defunct British sports media company blew up in 2018 when the firm went bankrupt. In April, Xue Feng resigned as chairman citing “work arrangements,” while in August chief risk officer Wang Yong left due to “career development,” the company said in filings.

As of the end of June, Everbright Securities had made 1.7 billion yuan ($240 million) of provisions against its estimated liabilities related to the acquisition, according to an August exchange filing.

Deal mania

The disastrous investment in MP & Silva Holding SA (MPS) was made by a subsidiary of Everbright Securities, Everbright Capital Investment Co. Ltd., in May 2016 when it joined a consortium that bought a 65% stake in the British company for 5.2 billion yuan. The deal took place at a time when Chinese companies were scrambling to snap up overseas businesses, many of which subsequently turned out to be duds.

In October 2018, MPS was declared bankrupt and liquidated. While Everbright Capital was a junior partner in the consortium and made a minority investment of 60 million yuan in the deal, it ended up owing about 3.5 billion yuan to two senior-tranche partners in the consortium, according to the brokerage’s 2018 annual report.

Everbright Securities made provisions of 1.52 billion yuan to cover its potential losses but that had risen to 1.7 billion yuan as of June 2019. The botched acquisition also led to a series of lawsuits involving Everbright Securities and other deal partners as the parties try to recoup their losses.

While its former investment partners are looking for cash from Everbright, the brokerage is in turn looking for compensation from another player in the deal, Baofeng Group Co. Ltd. Baofeng — which teamed up with Everbright to form the investment vehicle that raised the cash for the deal and made the stake purchase — had promised to purchase the MPS shares from the other investors in the consortium within 18 months of the closure of the takeover deal. It never followed through with this pledge. Baofeng’s founder and president, Feng Xin, has been detained on suspicion of “giving bribes to nonstate functionaries.”

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An investigation of the MPS debacle by the Shanghai bureau of the CSRC, a summary of which was published in March 2019, sharply criticized the company for its “poor management and control of subsidiaries,” “flawed internal control,” and failure to “strictly follow the internal decision-making procedures on major incidents.” The regulator held Xue Feng responsible for the company’s failures and he subsequently resigned in April.

Chen was a member of the supervisory board at Everbright Capital during the MPS debacle. However, a source close to the company told Caixin that the “Letter of Makeup of Shortfall” — a guarantee that Everbright Capital would make up any shortfall if the other partners failed to exit their investment as planned — was signed without Chen’s knowledge.

Punishments pledged

Caixin has learned, however, that Chen believes she performed her duties as required. The guarantee letter, which became a game-changer in the MPS deal, completely changed the risk Everbright Securities was exposing itself to but it was not delivered to the compliance department in advance of being signed.

Everbright Securities has so far punished eight employees over the MPS investment, with penalties including demotion and financial punishment, Caixin has learned. China Everbright Group, the brokerage’s parent company, ordered an internal inspection at Everbright Securities in May, and found “violations of discipline and regulations” in the MPS project.

A source close to Everbright Securities told Caixin that the company will dish out more punishment if new issues emerge. “Whoever is involved will be investigated according to the rules regardless of who’s involved or what excuses are made,” the source said.

Guo Yingzhe also contributed to this report.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter:@timmyhmshen)

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