December 8, 2017 / 9:59 AM / a year ago

Hong Kong penny-stock crash firm says two executives arrested

HONG KONG, Dec 8 (Reuters) - A Hong Kong company identified as part of a network of penny-stock firms whose share prices crashed spectacularly in June, said two of its executives are under investigation while another firm said it has been “invited to assist” authorities.

Both companies featured in a group dubbed in May by independent investor and stock commentator David Webb as the “Enigma Network”. Webb charted cross-shareholdings between 50 otherwise unrelated Hong Kong-listed companies.

Several Enigma stocks plunged within minutes of each other on June 28 for no clear reason, erasing over $6 billion in market capitalisation in a single day. Many shares lost more than half their value.

Among those whose stocks crashed were Convoy Global Holdings Ltd and Lerado Financial Group Co Ltd.

Late on Thursday, Convoy said in a stock exchange filing that it had suspended two executive directors who were being investigated by “enforcement officials”. Lerado said on Friday it had been invited to assist the Independent Commission Against Corruption (ICAC).

Also on Thursday, the ICAC said in a statement it had arrested three senior company executives. It did not identify the firms they were connected with, neither did it mention the Enigma Network or any related companies.

The anti-graft body also said it and markets watchdog, the Securities and Futures Commission (SFC), had searched eight premises in relation to the arrests in their first ever joint operation. It did not disclose the nature of the operation.

“You can see the level of the issue has been escalated beyond the SFC with the involvement of ICAC. It shows that the issue is unfolding and to a deeper level,” said Alvin Cheung, associate director of Prudential Brokerage Ltd in Hong Kong.

Convoy halted trading of its shares on Thursday morning. Trading in Lerado’s shares has been suspended by the SFC since June 7 on suspicion of Lerado publishing misleading information. Since the crash, the regulator has suspended trading of four more Enigma stocks.

“We are in the early days of this when several stocks have been suspended but the SFC has not taken any action against the companies involved,” Webb told Reuters.

On Friday, Convoy said it “followed standard protocol” in suspending the two directors “in order to support the investigation of the authority.”

The same day, Hong Kong newspaper Singtao Daily reported that the third arrested person was a former Convoy manager and now executive of Lerado. Newspaper Mingpao reported that the three were suspected of corruption related to share-backed financing.

Convoy, the ICAC and the SFC each declined to comment further on Friday. Several calls to Lerado went unanswered.

Shares in many of the 50 Enigma stocks were down on Friday.

Reporting by Clare Jim and Jennifer Hughes; Editing by Anne Marie Roantree and Christopher Cushing

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