Financial pain: FCA fines Cathay and two of its directors for breaches of Listing Principles and DTRs

An overview of the decision notices issued by the FCA to Cathay International Holdings Limited and two of its directors.

The FCA has fined Cathay International Holdings Limited (Cathay) £411,000 for breaches of the Listing Principles and the (then) Disclosure Rules and Transparency Rules (DTRs). It has also fined Cathay’s CEO £214,300 and its finance director £40,200 for being knowingly concerned in some of those breaches.

Cathay has announced that it and the directors are considering whether to refer the FCA’s decision to the Upper Tribunal.


Cathay is a Hong Kong holding company with a premium listing on the London Stock Exchange. It operates through a number of subsidiaries and during 2015 between 70%-80% of its revenue derived from one of its subsidiaries, Lansen Pharmaceutical Holdings Limited (Lansen). Cathay is a healthcare building company, and its subsidiary Lansen produces and sells treatments for rheumatic pain.

Cathay’s expected losses for the year ending 31 December 2015 deteriorated to USD 6.3m on 28 August 2015 from a loss after tax of USD 0.1m which had been published on 11 May 2015. At the same time the CEO was notified that the CFDA intended to impose a penalty on Ningbo Liwah, a subsidiary of Lansen, of RMB 18,290,177.32 (equivalent to approximately USD 2.9m).

In August 2015 and on 02 December 2015 the financial adviser advised that, due to the losses being substantially greater than market expectations, a trading update should be made as soon as possible and Cathay could not delay the announcement to coincide with Lansen’s announcement of the penalty imposed on Ningbo Liwah, which is what the CEO wanted to do. On 03 December 2015, legal advice obtained by Cathay agreed with the financial adviser and noted that it appeared an announcement would need to be made and specifically advised Cathay that it could not choreograph its announcements and delay disclosure to coincide with the announcement of Lansen’s penalty. Cathay did not, however, make an announcement then.

In a board pack sent to the board on 06 December 2015, the forecasts projected a year-end loss after tax of approximately USD 9.9m, which represented an approximate 56% deviation from the then market expectations of a USD 6.3m loss.

There were then various reasons for delay and an announcement was not made until 29 December 2015, when Cathay issued a trading update (December Announcement) stating that, due to operating expenses being significantly higher than anticipated, it expected a material loss before tax for the year ending 31 December 2015, which would be markedly above market expectations. It also disclosed a significant financial penalty imposed on Lansen. On the day of the December Announcement, Cathay’s share price dropped by 18.2%.

Cathay’s breaches

According to the FCA, Cathay breached:

Listing Principle 1 - as during the period from 21 August 2015 to 29 December 2015 (2015 period) Cathay:

  • did not have adequate procedures, systems and controls to forecast and monitor how it was performing against market expectations of its financial performance
  • failed to obtain from its main subsidiary, Lansen, accurate and complete financial information and had no means of obtaining that information when Lansen failed to provide it, and
  • failed to assess whether the financial performance of Cathay and its comparison to market expectations amounted to inside information and whether this gave rise to an obligation to make an announcement.

The FCA did not accept Cathay’s argument that its well-established process, which included preparing full-year projections twice annually, was sufficient. The FCA states that for a company’s procedures to be sufficient to enable it to comply with its obligations (including announcing any inside information as soon as possible) a company must check that its own expectations of financial performance are in line with market expectations, which the FCA says Cathay’s procedures did not allow it to do.

DTR 2.2.1R/ Premium Listing Principle 6 - as Cathay failed to disclose to the market as soon as possible on or shortly after 06 December 2015 a material change in its actual and expected financial performance for the year ending 31 December 2015 when, as a result of the deterioration of Cathay’s performance, Cathay was aware of a projected 56% deviation from market expectations of the loss after tax, and so created a false market in its listed equity shares.

The FCA rejected Cathay’s argument that it did not have inside information until 18 December 2015 as Cathay had, until then, a reasonable expectation that Lansen would obtain a large order before the year end.

Listing Principle 2 - as Cathay failed to be open and co-operative with the FCA when it provided the FCA in 2016, without any explanation, with materially different information about its forecasting procedures to the actual procedures followed at the relevant times during 2015.

In many of these cases the FCA found that Cathay’s senior management accepted the risk of their actions or were aware of a risk of a breach of the rules (including ignoring advice from their financial adviser and lawyers that the deterioration in losses was inside information that should be disclosed as soon as possible) but did not take the appropriate action and Cathay is therefore treated as having acted recklessly. The breaches are considered particularly serious (Level 4 for the breaches of Listing Principle 1, Premium Listing Principle 6 and DTR 2.2.1R and Level 3 for breach of Listing Principle 2).

CEO breaches

Mr Lee was the CEO of Cathay responsible for managing the day to day business activities of Cathay, including ensuring that effective internal controls and management information systems were in place, and supporting the operation of the Board by informing Board members and acting as a liaison between Cathay’s management and the Board. As part of this role, Mr Lee was responsible for reviewing and approving all Board papers before submission to the Board. As a result, it was Mr Lee who ultimately decided what matters were put to the Board, including in relation to matters escalated to him through his reporting lines at Cathay.

He was found by the FCA to be knowingly concerned in each of Cathay’s breaches, by virtue of his knowledge of, and involvement in, the matters which gave rise to Cathay’s breaches. The FCA decided that, as CEO, he failed to ensure that Cathay could comply with its obligations as a listed company. Mr Lee also reviewed and approved the relevant correspondence that was sent to the FCA in 2016 about the timing of the December Announcement.

FD breaches

Mr Sui was the FD of Cathay and was found by the FCA to be knowingly involved in the breach of Listing Principle 2, by virtue of his knowledge of, and involvement in matters. Mr Sui was responsible for drafting and signing the correspondence that was sent to the FCA in 2016 about the timing of the December Announcement and, according to the FCA, knew that the information being provided was not a contemporaneous record of events.

Cathay’s response

In a public statement after publication of the decision notices, Cathay has:

  • not accepted that its systems and controls were inadequate
  • said “special circumstances” meant that it was unable to prepare a quantified forecast for Lansen, but without accepting that this indicates a weakness in its systems and controls, or that its breach of Listing Principle 1 was reckless
  • denied being in possession of inside information, and denied any breach of Premium Listing Principle 6 being committed recklessly as it had a genuine belief that additional sales could bring its performance in line with market expectations, and
  • asserts that the FCA has accepted that Cathay did not intend to mislead the FCA.

Our view

There is much more to it than this, but the decision notice reinforces the enforcement decision against Lamprell plc for its failure, among other matters, to maintain systems and controls adequate to monitor its financial performance and identify inside information on a continuing basis. Cathay’s system of bi-annual year end forecasts and assessing projections and financial data from subsidiaries (leaving aside the special circumstances in which Cathay was unable to prepare a quantified forecast for Lansen in August 2015) were not treated by the FCA as “adequate”.

The enforcement decision reinforces, we think, the inability to offset bad news with expected later good news and the inability to bundle announcements into one.

Nonetheless, it feels as if the last of the issue has not been heard and perhaps an appeal to the Upper Tribunal beckons. Or, might Cathay consider it has suffered enough financial pain, and better prioritise the treatment of rheumatic pain and meeting other healthcare needs?

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.