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Cablegate: Chinatrust Bank Chairman Jeffrey Koo Penalized

VZCZCXRO0045
RR RUEHGH
DE RUEHIN #2493/01 2060838
ZNR UUUUU ZZH
R 250838Z JUL 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1242
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3338
RUEHBJ/AMEMBASSY BEIJING 5457
RUEHUL/AMEMBASSY SEOUL 7955
RUEHGP/AMEMBASSY SINGAPORE 6519
RUEHKO/AMEMBASSY TOKYO 7854
RUEHML/AMEMBASSY MANILA 9764
RUEHJA/AMEMBASSY JAKARTA 3890
RUEHKL/AMEMBASSY KUALA LUMPUR 3531
RUEHHI/AMEMBASSY HANOI 3101
RUEHBY/AMEMBASSY CANBERRA 4253
RUEHWL/AMEMBASSY WELLINGTON 1532
RUEHHK/AMCONSUL HONG KONG 6665
RUEHGH/AMCONSUL SHANGHAI 0254
RUEHGZ/AMCONSUL GUANGZHOU 9434

UNCLAS SECTION 01 OF 02 TAIPEI 002493

SIPDIS

SIPDIS

STATE PLEASE PASS AIT/W AND USTR
STATE FOR EAP/TC, EAP/EP
USTR FOR WINTER AND WINELAND
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/LMOGHTADER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: ChinaTrust Bank Chairman Jeffrey Koo Penalized


SUMMARY
-------

1. On July 20, Taiwan's Financial Supervisory Commission (FSC)
ruled that ChinaTrust Financial Holdings (CFH) and CFH's subsidiary
ChinaTrust Commercial Bank (CCB) violated regulations in their
acquisition of equity shares in Mega Financial Holdings. The
violations included failure to disclose CCB Hong Kong's existing
ownership of 440 million Mega shares, as required by Taiwan
regulations. The FSC fined CCB, required CFH to sell its Mega
equity shares, and ordered Jeffrey Koo, Jr., to step down as
Chairman of CCB. CFH share prices have fallen, along with hopes of
significant consolidation in Taiwan's banking sector. END SUMMARY.

Earlier Penalties
-----------------

2. On June 27, the FSC imposed two penalties on CFH and CCB for
unreported trading in overseas structured bonds through which CCB
acquired nearly 4% of ownership in Mega. First, the FSC prohibited
CCB from setting up new overseas offices and CFH from future
investment in other financial institutions. Second, the FSC
prohibited CFH and CCB from raising additional capital for merger or
acquisition purposes.

Additional Penalties
--------------------

3. On July 20, the FSC imposed another six penalties after
discovering that CFH and CCB had committed additional violations of
disclosure regulations. The FSC:
--ordered CFH to end Jeffrey Koo's role as Chairman;
--ordered CFH to penalize other responsible executives and officers
of CFH and CCB;
--fined CCB NT$10 million (US$307,692);
--restricted for one year CCB's Hong Kong branch from trading in
derivatives linked to stock prices;
--required CFH to sell 440 million Mega shares; and
--required CFH to dissolve arrangements it made for irregular
trading of structured bonds.

Violations
----------

4. In January 2005 CCB received FSC permission to issue US$500
million of bank debenture to serve as lending funds. However, CCB
used US$390 million of the fund raised to buy overseas structured
bonds, without obtaining the FSC's prior permission or prior
reporting to the FSC.

5. In September 2005, CCB's board authorized CCB's Hong Kong branch
to buy US$260 million of structured bonds linked to a basket of
stocks in Taiwan, Hong Kong, Japan, and South Korea. A December
2005 CCB board resolution authorized CCB to buy another US$130
million of structured bonds also linked to stocks in these four
economies. However, the FSC found that the purchases of structured
bonds were actually executed by CCB (Taipei), rather than by CCB's
Hong Kong branch, and the structured bonds were not linked to a
basket of stocks as authorized, but linked only to Mega equity
stocks.

6. The FSC found that the CCB illegally sold the US$390 million of
structured bonds in January 2006 without required authorization of
CCB's board. The sales were executed based on the personal
instructions of CCB Chairman Jeffrey Koo, Jr. In addition, CCB did
not follow proper internal risk control practices when it sold the

TAIPEI 00002493 002 OF 002


bonds.

Impacts
-------

7. The Koo family financial empire uses CFH to run the largest
privately-owned network of banks in Taiwan. The FSC's penalties
highlight CFH's poor corporate governance and have prompted foreign
portfolio investors to downgrade investment ratings for CFH.
Paribas Securities has lowered the targeted CFH share price by 25%
from NT$28.6 to NT$21.6. On Taiwan's stock market, the CFH share
price has declined from NT$27.1 to NT$24.5 so far in July. In
addition, the FSC's penalties have put an end to CFH's plan to merge
with Mega and will likely dampen enthusiasm for much needed bank
consolidation.

Young

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