The FSC alleged that Chinatrust Financial Holding had acquired an additional stake in Mega Financial Holding through its banking unit’s Hong Kong branch, which bought $390 million of 30-year structured notes from a foreign securities firm in Hong Kong during October to December 2005.
The FSC added that the bank’s board of directors had initially given approval on September 30, 2005, for the bank to make purchases of structured notes worth $260 million through its Hong Kong branch. On December 6, 2005, approval was given for the Hong Kong branch to purchase an additional $130 million worth of structured notes. Although the structured notes were believed to be linked to a basket of foreign stocks at the time, it eventually emerged that they were linked predominantly to shares of Mega Financial Holding that were equivalent to a 3.9% stake and enabled the bank to increase its ownership in Mega to 9%.
Although it is known that Chinatrust had received approval earlier this year to buy up to 10% of Mega Financial in the open market – double the 5% limit allowed under the island’s Banking Law - the FSC criticised the bank for not reporting the purchase of the additional stake through the structured notes. Funding for the purchases of the structured notes came from $500 million of subordinated bonds floated by the Hong Kong branch of Chinatrust in February 2005. The FSC said the funds, which were originally intended to be used for the loan business, had been put to improper use, and, while Koo had been aware of this, he had failed to report the change of usage of the funds.
Earlier this year, before Chinatrust announced its plan to buy up Mega Financial shares, the Hong Kong branch sold the $390 million worth of structured notes to a ‘third party’. This immediately led to an increase in supply of linked Mega Financial shares in the open market that were mostly acquired by Chinatrust Financial and boosted the group’s stake in Mega Financial to 15.6%.
In the statement released on July 20, the FSC said it would levy a fine of NTD$10 million ($304,377) on Chinatrust, and also impose a ban on its Hong Kong branch from dealing in derivatives for a year. In addition, the FSC would reduce the limit for Chinatrust’s shareholding in Mega to 5-6.1% from 5-10%, and it would also demand that Chintrust seek reimbursement from the third party involved in the structured note transaction. It also ruled that Chinatrust must consider whether Koo was still fit to serve as the bank’s chairman.
Chinatrust officials were not available for comment, but the bank said in the statement that it is investigating the matter internally.
Chinatrust’s acquisition of a large stake in state-controlled Mega Financial was part of the government’s effort to press for consolidation in the financial sector. But the authorities have been blamed by opposition lawmakers for selling state assets at a cheap price.