The FCA has decided to fine a premium listed issuer, Cathay International Holdings Limited (Cathay) £411,000 for a number of breaches of the Listing Principles and the Disclosure and Transparency Rules. In addition, the FCA has decided to fine Cathay’s CEO £214,300 for being knowingly concerned in those breaches and its Finance Director £40,200 for being knowingly concerned in one of the breaches.
Cathay has issued a statement indicating that Cathay, its CEO and Finance Director do not agree with the FCA’s findings or penalty and are considering whether to refer the Decision Notices to the Upper Tribunal. The Decision Notices were published on 3 June 2019 following the release of Cathay’s statement on 31 May 2019 and prior to the expiry of the time limit for any reference to the Upper Tribunal in mid-June 2019.
On 29 December 2015, Cathay announced that its year end performance would be markedly lower than market expectations and that a significant financial penalty would be imposed on an indirectly owned subsidiary by the CFDA (a Chinese food and drug regulatory body). Following the announcement Cathay’s share price fell by 18.2%.
The FCA has decided that:
- Cathay failed to put in place adequate procedures to comply with its obligations, including in order to forecast and monitor whether Cathay’s financial performance was in line with market expectations or whether its weaker financial performance constituted inside information requiring announcement to the market as soon as possible, in breach of Listing Principle 1;
- Between 6 December and 29 December 2015, Cathay failed to inform the market of its deteriorating financial performance giving rise to a false market, in breach of DTR 2.2.1 R and Premium Listing Principle 6;
- During the early stages of the FCA’s investigation concerning Cathay’s market disclosure, Cathay provided inaccurate and/or incomplete information to the FCA, in breach of Listing Principle 2; and
- The FCA has decided that Cathay’s CEO was knowingly concerned in all Cathay’s breaches and its Finance Director was knowingly concerned in the Listing Principle 2 breach in his role as author and signatory of correspondence with the FCA.
In the FCA’s view, Cathay recklessly breached Listing Principle 1 due to a lack of adequate procedures, systems and controls to enable it to comply with its obligations, including in relation to:
- forecasting (such as Cathay’s reliance on a majority owned pharmaceutical subsidiary (the Subsidiary) which contributed 70-80% of its revenue at the relevant time to provide financial information to enable Cathay to assess its overall performance and a lack of a contingency plan in circumstances where the Subsidiary failed to provide a forecast); and
- monitoring how Cathay was performing against market expectations and whether its performance constituted inside information that should be disclosed to the market as soon as possible.
Notably, the FCA considers that an analyst note released by Cathay’s corporate broker (the Corporate Broker) in May 2015 (the Note) was the “best indicator of market expectations.” Cathay should have monitored its financial performance against market expectations set by the Note rather than monitoring against its internal budget or an unquantified outlook statement released in March 2015, neither of which were comparable to the market expectations set by the Note.
Subsequently, in August 2015, the Corporate Broker published its revised expectation in an analyst note that Cathay would make a loss after tax of USD 6.3 million at 2015 year end. The FCA considers that Cathay relied on the fact its Corporate Broker would downgrade market expectations on the same day as it published its interim results as a reason not to make its own announcement. The Corporate Broker advised Cathay on its disclosure obligations on a number of occasions during 2015.
By 6 December 2015, Cathay’s consolidated group forecast was available and showed a material deviation of 56% from market expectations. The FCA considers that, due to the failure to announce to the market its deteriorating financial performance earlier than 29 December 2015, a false market in Cathay’s equity shares had been created between 6 December and 29 December 2015. As a result, Cathay recklessly breached DTR 2.2.1 R and Premium Listing Principle 6.
Factors taken into account by the FCA included:
- the fact that Cathay had received legal advice in early December 2015 that there were no grounds to delay the announcement of the deteriorating financial performance pending announcement of an upcoming financial penalty by the CFDA and that announcements could not be choreographed. The FCA considers that, nonetheless, Cathay was influenced by matters including “the prospect of multiple bad news announcements”; and
- the prospect of new product sales by the Subsidiary was not sufficiently certain to displace circumstances giving rise to a notification obligation. Discussion of such sales at a Board meeting on 10 December 2015 was not minuted, nor were such projected new sales included in the Subsidiary’s own forecasts, for example. In the FCA’s view, Cathay should at least have issued a holding announcement on or soon after 6 December 2015 putting the market on notice of a potential material change to its expected financial performance.
3. Providing clear and accurate information to the FCA
Early in the FCA’s investigation, two letters were sent to the FCA containing inaccurate and /or incomplete information in response to requests by the FCA regarding information that had been available to the Board during the relevant period. Materially different information was provided to that requested by the FCA, including figures which did not exist contemporaneously, and without any explanation in breach of Listing Principle 2. Submissions made by Cathay to Regulatory Decisions Committee suggested that the information provided to the FCA reflected financial information that had been available to Board at the time “in broader sense” (such as taking into account oral updates).
In the FCA’s view, the letters implied that Cathay’s procedures, systems and controls were stronger than was in fact the case and gave the impression that certain forecasts were available to the Board when they were not, which could have led to a decision by the FCA to conduct no further investigations. The FCA emphasised that the provision of inaccurate information undermines its ability to effectively monitor and regulated the integrity of the UK financial markets.
These Decision Notices serve as a reminder to issuers of the following principles:
- the need to avoid seeking to choreograph announcements;
- the importance of monitoring whether financial performance remains in line with market expectations, including expectations set by third parties (such as a corporate broker or sponsor);
- where an obligation to announce has been triggered, optimism about future developments which are not sufficiently certain may not justify a decision not to announce. The FCA has confirmed that an issuer should consider a holding announcement in such circumstances;
- the importance of documenting the rationale for decisions concerning whether an announcement is required, given the possibility that they might be re-visited at a later date with the benefit of hindsight; and
- the importance of carefully reviewing correspondence with the FCA by reference to the questions posed and contemporaneous material, particularly where drafting has been delegated.