By Hong Kong correspondent Wang Duan and staff reporter Chen Huiying

(Caijing Magazine)It was early December when the market heard the first, ugly rumors linking Hong Kong investment firm Citic Pacific and its prestigious chief Larry Yung to a possible investigation by local police.

Citic Pacific Ltd. (HKSE: 0267) denied any probe until changing the tune January 2, when a company statement acknowledged that its board of directors was being investigated by the Hong Kong securities regulator.

Rumors and reality played a similar game a few months later when, during a press conference announcing Citic Pacific’s 2008 financial results, Yung sidestepped questions about his possible demise.

Asked whether he would resign in the face of the securities probe, Yung declared, “I am still the chairman of the company, and whether to resign will be decided by the board.”

Ten days later, though, authorities from the Hong Kong Commercial Crime Bureau raided the company’s headquarters, hauling away documents and computers, and making accusations of falsified financial statements and a conspiracy to defraud.

So far, no arrests have been made. But on April 8, Citic Pacific announced that Yung and his 20-year business partner -- company managing director Henry Fan -- had resigned.

The ongoing investigation followed Citic Pacific’s massive losses last fall tied to wrong-way bets on foreign currency derivatives.

After the rumors proved true – and Yung resigned -- the market reaction was generally positive. Citic Pacific shares rose 12 percent on April 9 after Chang Zhenming, deputy chairman and president of Citic Pacific’s parent CITIC Group, was named the new chairman and managing director.

Yung’s Exit

Yung said he wants the best for Citic Pacific, a major financial figure in Hong Kong with tight links to his influential mainland family.

“The execution on 3 April 2009 of the search warrant by the Commercial Crime Bureau requiring the company and its directors to provide information has had a great impact on society,” Yung wrote in a resignation letter to directors. “Faced with this reality, I think that my resignation would be in the best interests of the company.”

The legal trouble stemmed from the company’s decision to delay a disclosure of a HK$ 14.6 billion loss. The investment disappeared in September when foreign exchange forward contracts soured. But the company did not report the disaster until the following month. Later, the company’s finance director Leslie Chang and chief financial officer Chau Chi-yin bowed out.

It happened after the company bought currency contracts to fund an AU$ 1.6 billion iron ore mine in Australia, and the Australian currency’s value tumbled against the U.S. dollar. The company said investigators were looking at currency contracts from 2007 and ’08, as well as financial records and statements issued between July 1, 2007, and March 16, 2009.

Some directly blamed Yung for the losses. These include Wilson Tong, a professor at the School of Business and Management, Hong Kong University of Science and Technology, who told Caijing that, based on corporate governance procedures, Yung should have resigned earlier.