China Metal Recycling: 'China's scrap king' was a fraud — Hong Kong wound it up

China Metal Recycling, a Guangzhou-based scrap-metal group founded in 2000, listed on Hong Kong's Main Board on 22 June 2009 at HK$5.15 a share and jumped 24% on debut. The court's later findings traced the fraud to before that listing: its Macao subsidiary Central Steel was, in effect, a factory for generating false documents, with fake shipments between the US and the PRC, false shipping records and round-robin transactions spanning Hong Kong, Macao, the mainland and the US inflating the group's revenue and profit from 2006 to 2012.

The first alarm came within five months of listing: chief financial officer Wong Hok-leung resigned abruptly in November 2009, citing denial of access to key information, and the shares fell 24% in a day. The SFC investigated from the next month. Yet the reported business kept growing in ways that were physically impossible. Its claims implied ~113,000 tonnes of scrap copper imports a month, 34% of China's total, yet customs data never ranked it in the top 10 — Chiho-Tiande, a rival a fifth its claimed size, topped the list. In 2011 it claimed volumes about 3,500% beyond its import permits.

On 28 January 2013 the California short seller Glaucus Research published a 'Strong Sell' report: 'China Metal Recycling purports to be the largest scrap metal recycling company in China. We believe that this is a lie.' Trading was suspended the same day. Glaucus also flagged a heavily levered balance sheet — HK$5.7bn of bank debt as of June 2012 — and noted that UBS had sold US$80m of the company's senior notes and invested US$25m of its own. On 26 July 2013, after the SFC's investigations, the company was placed into provisional liquidation.

On 26 February 2015 the Court of First Instance wound up China Metal Recycling in the public interest — the SFC's first use of its section 212 power against a listed company. Mr Justice Harris found 'a fraud on an industrial scale' going 'directly to the integrity of the listing'. Management denied impropriety, then withdrew from the case without accepting liability. The company was delisted in 2016. The gatekeepers fared little better: in 2019 the SFC fined UBS a record HK$375m and suspended its sponsor business, in a sweep that also hit Standard Chartered, Morgan Stanley and Merrill Lynch.

Listed at HK$5.15 in 2009, delisted for fraud in 2016; HK$5.7bn of bank debt at the short seller's count; UBS fined a record HK$375m

The fraud predated the IPO, so every later disclosure had to defend the original fiction — the scheme grew for six years across Hong Kong, Macao, the PRC and the US.

Internal alarms were ignored: a CFO who quit saying he was denied access to key information was read as noise, not as the loudest possible signal.

The claimed volumes were physically impossible and publicly checkable — customs and permit data contradicted the prospectus years before Glaucus assembled the case.

Underwriting economics drowned diligence: UBS sold the company's notes, invested US$25m in them and earned an extra 1% incentive fee on the IPO it sponsored.

Fraud needs a growing staff of lies: each year of fake shipments made the next audit harder. External checks — a CFO denied information, customs data, one short seller — eventually beat any auditor.

The winding-up order of 26 February 2015 became the reference point for SFC public-interest petitions, and the exchange delisted the company for 'obtaining listing by fraud' in 2016. In March 2019 the SFC imposed a record HK$375m fine on UBS and suspended its sponsor business, while Standard Chartered, Morgan Stanley and Merrill Lynch were also fined for diligence failures. UBS, Hong Kong Free Press noted, had banked HK$36m in interest on CMR notes it partly held itself — a tidy illustration of why the diligence stopped.