Bank of China wins U.S. case


Winning the case removes one cloud ahead of the Bank of China's $3.2 billion stock sale this month

By Alex Frew McMillan

HONG KONG, China (CNN) -- The Bank of China has won $133 million in damages in a U.S. court case against two customers and an ex-employee.

The bank sued John Chou and his wife, Sherry Liu, in February 2001, in U.S. District Court in New York.

The victory is in favor of the New York branch, part of the Beijing-based bank. But the court also threw out three countercharges against the Bank of China Hong Kong.

The Bank of China Hong Kong is preparing to sell stock for the first time on July 25. So the ruling lifts some of the clouds surrounding its parent's operations overseas and at home.

"To the extent that there is some uncertainty, and there's less uncertainty now, then that's a good thing with the bank," Jonathan Ross, the Hong Kong bank's legal counsel, told CNN on Tuesday.

A cloud clears before IPO

A jury found in favor of the Bank of China last Thursday, awarding $35 million for compensation and $98 million in punitive damages.

A lawyer for the bank stated after the decision that it is now clear the couple ran a decade-long scheme to defraud the bank.

The bank argued that Chou and Liu used false documents to get letters of credit from the bank, then used the money to pay off earlier letters of credit.

The defendants countered that the Bank of China Hong Kong had asked them to take part in a currency-arbitrage plan aimed at propping the value of the Hong Kong dollar.

They claimed that the Hong Kong branch then covered up the scheme with its New York office, to fool U.S. investigators.

Banker breached fiduciary duty

But the jury rejected the defendants' arguments. The judge threw out two claims against the Hong Kong bank, for racketeering and conspiracy.

A charge that the Hong Kong bank was negligent went to the jury, which rejected it. The judge can still adjust the settlement for the New York branch.

The jury also found against former bank worker Patrick Young, stating that he breached his fiduciary duty in overseeing Chou and Liu's accounts.

A lawyer for the bank said the fraud was revealed when workers discovered discrepancies in Chou and Liu's documentation.

"There were references to ships which did not exist and goods whose descriptions did not match up," Richard De Palma, a partner with Coudert Brothers, told the Wall Street Journal.

"It was a 10-year long Ponzi scheme," he said.

The defendants plan to appeal. Their lawyer stated that the judges' instructions to the jury were "erroneous" and said his firm, Alfieri, Frohman & Primoff, did not have sufficient time to prepare for the case because the judge moved it through "in a certain time period."

A $20 million fine

The bank was ultimately fined $10 million by U.S. bank authorities in January for questionable loan practices. Chinese authorities added a $10 million fine of their own (full story).

The bank's former president, Wang Xuebing, was fired from his new employer and stripped of his positions in banking (full story).

According to the prospectus of the Bank of China Hong Kong, Wang is now being prosecuted by Chinese authorities.

The Bank of China's IPO has attracted strong retail interest in Hong Kong. This was expected, given its strong brand. It is the second-biggest bank in Hong Kong, by assets, after HSBC.

Some critics have said the bank should not go public until it resolves scandals such as the New York case and a separate embezzlement incident from its Kaiping branch (full story).

The Hong Kong branch says it has made provisions for losses in that scandal and is still collecting collateral and payments on the money it loaned three Kaiping managers.

Sale up to $3.2 billion

The stock offering amounts to 2.6 billion shares, or 25 percent of the bank, at HK$6.93 to HK$9.50, with 10 percent set aside for "man in the street" retail investors.

The total sale will raise up to HK$24.7 billion ($3.2 billion) for the bank, which is expected to lead the way for China's other large financial institutions (full story).

The Bank of China Hong Kong has printed three million application forms, in a city of 6.8 million people.

Because the offer is already oversubscribed, potential investors have been waiting for forms, then returning to the back of the line to reapply.

Hong Kong investors also have a track record of holding stock for short-term gains. But the bank is attempting to position the stock as a long-term play.