Early today HK time, avoiding local press coverage, the US SEC announced David Li's HK$63.2m settlement of charges of insider tipping in the Dow Jones case. We call on him to do the honourable thing and resign as a member of Hong Kong's cabinet and legislature.

Resign, Mr Li
6 February 2008

Opinion poll results

With almost perfect timing (if you are a defendant), the United States Securities and Exchange Commission early this morning Hong Kong time announced that it had charged David Li Kwok Po (Mr Li), a former director of Dow Jones & Company, Inc. and reached a settlement with him in the case. The announcement came too late to catch this morning's newspapers, most of which will not publish on Thursday or Friday due to the Chinese new year holidays.

Mr Li was charged with illegally tipping off close friend Michael Leung Kai Hung (Mr Leung) who, through his daughter Charlotte Leung Ka On and her husband Wong Kan King (Mr Wong), then allegedly engaged in illegal insider dealing, buying 415,000 Dow Jones shares worth US$15m before the announcement of the takeover offer by Rupert Murdoch's News Corp. They stood to make a profit of US$8m if they had not been caught. The SEC also charged that Mr Wong bought 2,000 Dow Jones shares for his own account, with a potential profit of US$40k.

As is customary in such settlements, without denying or admitting the allegations, Mr Li agreed to pay a civil penalty of US$8.1m (HK$63.2m), Mr Leung agreed to pay US$8.1m in disgorgement of profits plus a penalty of US$8.1m, and Mr Wong agreed to pay US$40k in disgorgement plus a penalty of US$40k. In Mr Li's case, the settlement is more than twice his 2006 remuneration of HK$27.0m (US$3.47m) as Chairman and CEO of The Bank of East Asia, Limited (BEA, 0023).

The full complaint in this case makes fascinating reading. Start on page 7 at paragraph 26 for the details. According to the SEC, Mr Li, as a non-executive director of Dow Jones, learned of News Corp's $60 per share offer on the evening of 12-Apr-07, HK time, and the next morning, Fri-13-Apr-07, Mr Li and Mr Leung travelled together on a flight to Shanghai, during which Mr Li tipped off Mr Leung. Soon after arriving in Shanghai, Mr Leung called his son-in-law, Mr Wong, who began making phone calls to his broker Merrill Lynch. When the US market opened later that day, they began buying shares in Dow Jones, totaling 200,000 shares over 4 days to 17-Apr-07 at an average of $35.88.

The complaint continues that 13 days later, on 30-Apr-07, Mr Wong bought, at Mr Leung's instructions, a further 215,000 shares at an average of $36.374. The next day, at about 11:13  in New York, CNBC broke the news of the takeover offer, and the stock was halted at about 11:22. It jumped to a closing price of $56.20 after Dow Jones confirmed the offer and trading recommenced.

The Executive and Legislative Council

Mr Li's close friends also include Hong Kong Chief Executive Donald Tsang Yam Kuen (Mr Tsang). Mr Li was the Chairman of Mr Tsang's "election" campaign in both 2005 and 2007, sending fund-raising letters to the great and the good of HK, and himself donating. As many readers will know, Hong Kong's Chief Executive is chosen by a small-circle committee of 800 people dominated by tycoons with a smattering of Beijing-friendly left-wingers. We covered the fund-raising in detail in our article Don's Donations (7-May-07). After Mr Tsang was nominated unopposed in 2005 as Chief Executive, he appointed Mr Li to his cabinet, known as the Executive Council, on 1-Nov-05. This is Hong Kong's highest policy-making body. After Mr Tsang's re-election, on 1-Jul-07 Mr Li was awarded HK's highest gong, the Grand Bauhinia Medal, which is normally reserved for Beijing-friendly tycoons, retired judges of our highest court, and former Chief Executives and Chief Secretaries (the number two position in HK). Only 42 GBMs have been awarded, and at least 10 are now dead.

Since 1985, Mr Li has also been a member of the Legislative Council, representing the Banking functional constituency  - another of HK's small-circle elections with an electorate consisting of authorised banks.

Resignation is the honourable course

Mr Li's US$8.1m settlement of the alleged insider tipping case brings into question his continued role in the cabinet and legislature. If a member of George Bush or Gordon Brown's cabinet entered a settlement in such a case, he would surely resign. If a member of the US Senate or House of Representatives were involved, he would also resign. As a cabinet member, Mr Li is privy to all sorts of confidential and potentially price-sensitive information about Hong Kong affairs, and he also has input in shaping policy. He has a duty of confidentiality which the SEC claims he had trouble keeping in the Dow Jones case. Mr Li should do the honourable thing, and avoid undermining the reputation of Hong Kong's cabinet and legislature. He should resign.

He did not admit or deny wrong-doing, but if he was that confident of his defence, then he would have fought the case and cleared his name rather than settle it. Politicians, however well-connected, should not be allowed to retain their positions by buying their way out of allegations. If he doesn't go, then it underlines how unaccountable Hong Kong's cabinet and functional constituencies are.

As a secondary matter, under the Banking Ordinance, the Hong Kong Monetary Authority has a duty to review, in the light of the SEC's allegations, whether Mr Li is a fit and proper person to be Chairman and Chief Executive of a licensed bank, BEA (see paragraphs 4.11 to 4.18 of Chapter 4 of the HKMA's Guide to Authorization). There are also 10 other HK-listed companies in which he sits as an independent non-executive director - he ranks equal 4th as one of the busiest INEDs in Hong Kong, as well as serving on overseas boards. They should all reconsider whether Mr Li is an asset to their boards.

Opinion poll results

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