As chairman, Tong said, Yung should accept responsibility for the misconduct of other executives.

A senior attorney told Caijing that the securities regulator investigation has taken aim at corporate governance and executive responsibility issues. But the police action indicated that company directors may face criminal charges as well.

A source close to the company said “the police very likely had enough evidence before the raid to justify such a high-profile search.”

Under Hong Kong law, a conspiracy conviction can lead to 14 years in prison, and company directors that file false statements can be sentenced to 10 years.

End of an Era

Yung is a member of a prestigious family credited with supporting Hong Kong’s development. His father is Rong Yiren, who founded the China International Trust and Investment Co., now CITIC Group, on the mainland in 1979.

Rong helped attract many of the first Western investors to China, and later rose politically to serve as China’s vice president from 1993-’97.

Yung started his business career in Hong Kong in 1978, operating an electronics factory with relatives. Nine years later, he joined CITIC Group subsidiary Citic Hong Kong as chairman and general manager.

Citic Hong Kong launched a back-door listing in 1990 through a company called Tylfull, which was eventually renamed Citic Pacific. A year later, the company acquired a 12.5 percent stake in the Hong Kong airline Cathay Pacific Airways Ltd., and 20 percent of the Macau phone company Companhia de Telecomunicacoes de Macau. It also bought a 36 percent stake in the trading company Dah Chong Hong, turning it into a wholly owned subsidiary the next year.

Citic Pacific continued expanding and, a few years later, became the largest Chinese-controlled company in Hong Kong as well as the first mainland firm to join the exclusive Hang Seng Constituent Index on the Hong Kong stock market.

“At that time, the company enjoyed certain flexibility in policies and finance,” a Citic Pacific source told Caijing. “It played a pivotal role during the special era after Hong Kong’s 1997 handover.”

At the end of 1996, CITIC Group sold 18 percent of Citic Pacific shares for HK$ 33 each to the company’s management team, reducing the parent’s stake to 26 percent. The HK$ 10.8 billion deal further strengthened the Yung family’s influence at Citic Pacific, even though CITIC Group remained the controlling shareholder.

Citic Pacific was hit badly and its share price fell dramatically in 1998 during the Asia financial crisis. CITIC Group provided a bailout in the form of a HK$ 1.1 billion loan. But as China’s economy opened wider and grew rapidly, Citic Pacific’s special status waned.

In 2000, Citic Pacific tried but failed to enter the mainland telecommunications market. Seeking new investments, the company launched equity acquisitions of several steel plants, including Jiangyin Xingcheng Iron & Steel Co., Hubei Xinyegang Co. and Shijiazhuang Iron & Steel Co.

While expanding in the steel sector, Citic Pacific realized the importance of upstream resources. So in March 2006, the company acquired rights to 6 billion tons of iron ore reserves in Western Australia. It also got 17 ore carrier ships.

Citic Pacific’s demand for Australian dollars rose alongside its iron ore investments. That led to the derivatives bets on the currency, and eventually the HK$ 14.6 billion loss.

Post-Yung Changes

Yung’s departure has triggered changes in Citic Pacific’s financing, personnel and business strategies. The reshuffling may bear the stamp of the mainland parent CITIC Group’s authority over the Hong Kong-listed company.

Chang’s appointment as chairman increased Citic Pacific’s board to 16 members, with two newcomers from CITIC Group. Yung’s son, Rong Mingjie, still holds a seat. And Yung has not given up his 11.53 percent stake in the company.

Since Citic Pacific first disclosed the 2008 loss, blaming an unauthorized currency bet, CITIC Group has offered a bailout plan that includes a purchase of company convertible bonds to raise HK$ 11.6 billion. The parent also recently increased its stake to 57.6 percent from 29 percent.

The company’s latest annual report, released in late March, said the foreign exchange debacle contributed to a net loss HK$ 12.7 billion in 2008. It also announced a one-year delay for production at its iron ore project in Australia – a postponement that market analysts said may generate additional losses.

Despite recent stock market support, investment banks have lowered their outlooks for Citic Pacific. Wu Xiling, an analyst at JP Morgan, said the management change was just a first step toward reviving investor confidence. He said it’s too early to say whether the parent will provide more support.

A Citibank report said, “We believe the new chairman will speed up Citic Pacific’s pace in spinning off non-core assets, which may include power assets, Hong Kong tunnel holdings, and its stake in Cathay Pacific.”

A Hong Kong-based foreign fund manager told Caijing that Chang’s appointment “may stabilize investor confidence in the short term, but the company’s mid-term and long-term outlook remains uncertain.

Citic Pacific’s “business structure is diverse and dispersed,” the fund manager said. “And the result of the police investigation is unclear.”

Citic Pacific’s problems in the past were blamed on its dispersed investment portfolio without a core focus. Now, market analysts expect Chang will turn the company’s focus to the steel and iron ore sectors, and push forward the integration of businesses that overlap with the parent. A CITIC Group team has started evaluating its investments.

In an interview with Caijing last November – before the worst rumors proved true -- Chang cited “many inquiries” about whether the company would sell its investments in Hong Kong tunnels or Dah Chong Hong. “Our attitude is clear: We won’t sell any assets of Citic Pacific at this moment,” he said.

Chang tried to put a positive spin on the derivatives losses. “I believe Citic Pacific will still be a good company after the crisis,” he said. A few weeks later, police moved in.