Court rules against underwriter in China's first interbank bond fraud case
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A CHINESE court has ruled that an underwriter and two other intermediaries failed to conduct due diligence adequately and were responsible for up to 20 per cent of a loss of more than US$72 million by Bluestone Asset Management.
Bluestone, which incurred the 500 million yuan (S$97.3 million) loss from its investment in a bond issued by Dalian Machine Tool Group, sued the underwriter Industrial Bank and other intermediaries for fraud. This was after the issuer defaulted, and admitted to faking credit enhancement measures.
The Beijing Financial Court ruled on the first fraudulent disclosure case in China’s interbank bond market on Dec 30, according to a court statement seen by Reuters on Tuesday (Jan 3).
In a statement to Reuters, Bluestone welcomed the ruling in its favour, saying it was good for the market. But it added that the penalty for the fraud was inadequate and unfair.
The ruling “protects investors and the fundamental integrity of the bond market”, Bluestone said, while adding that the judgement on accountability was “unfair”.
“It grossly ignores the fact that false disclosure concealed Dalian Machine Tool’s inability to repay debts, and was the root cause of the plaintiff’s loss,” Bluestone said.
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Industrial Bank declined to comment. Bluestone did not say if it would take further legal action on the matter.
The ruling comes as Chinese bond defaults are rising in a slowing economy and a property debt crisis. Compared with the institution-dominated bond market, China has taken a much harder line against fraud in the stock market, where there are many retail investors.
The Beijing Financial Court said: “As the first case involving false disclosure in China’s interbank bond market, the ruling, when effective, will further set the bar for various participating institutions in the bond market.”
“It will also prod institutional investors to invest cautiously and decide rationally.”
The court urged underwriters and other intermediaries to make sure that investors can have access to accurate and complete information from bond issuers. REUTERS
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