Australia's markets watchdog is suing the country's third-largest iron ore miner, Fortescue Metals (FMG.AX: Quote), and its chief, Andrew Forrest, accusing them of misleading investors over Chinese deals struck five years ago.

The Australian Securities and Investments Commission (ASIC) said it would also ask the courts to consider barring Forrest, the company's billionaire founder, from being a company director.

Fortescue shares fell as much as 8 percent on Friday on the prospect of Forrest being forced out of the company, which said it would defend itself.

We are very conscious that what's been presented has not been supported by the facts and we will defend it vigorously, Executive Director Graeme Rowley told reporters in Melbourne.

We've done a considerable amount of work in preparing for this case and we are going to defend the given allegations.

The ASIC is also seeking fines of up to A$6 million ($4.3 million) against Fortescue and up to A$4.4 million against Forrest, who had turned the company from a speculative penny stock into one of Australia's biggest mining stocks.

It's more about him as an individual than the company, said Steve Robinson, fund manager with Alleron Investment Management, adding that the potential fines were insignificant.

You would have to say, he was the driver of Fortescue, he said, noting, however, that the company would be much better able to manage without Forrest now than during its infancy.

Forrest was Australia's richest person at the height of the commodities boom last year. He was then worth $7 billion.

The former stockbroker carved out his fortune with the help of Chinese firms, which were eager to fund Fortescue and create a rival supplier to Australia's two dominant iron ore miners, Rio Tinto (RIO.AX: Quote) (RIO.L: Quote) and BHP Billiton (BHP.AX: Quote) (BLT.L: Quote).

Earlier this week, Fortescue won approval for a Chinese customer, state-owned Hunan Valin Iron and Steel Group, to take a 17.55 percent direct stake in the company for $438 million.

The ASIC case was unlikely to affect that deal, Robinson said.

The commission said its case against Fortescue involved announcements the firm made between August and November 2004 about agreements with three state-owned Chinese firms that signed up to fund new mining and transport infrastructure.

Fortescue announced in November 2004 that China Railway Engineering Corp, China Metallurgical Engineering Construction Group Corp and China Harbour Engineering Corp had agreed to finance and build a A$1.85 billion ($1.32 billion) mining-rail-port project for Fortescue in northwest Australia.

Four months later, the Chinese trio's lead negotiator, China Metallurgical, was quoted by the Australian Financial Review as saying the agreements were not legally binding and as expressing doubts about Fortescue's iron ore reserves.

ASIC alleges that Fortescue engaged in misleading and deceptive conduct by overstating the substance and effect of agreements with the three Chinese companies, in announcements and media releases made to the market and investors, it said.

Between the relevant dates cited by the commission for its complaints against Fortescue -- Aug. 23 and Nov. 9, 2004 -- the company's share price jumped almost four-fold.

(Additional reporting by Mark Bendeich, James Regan and Denny Thomas in SYDNEY; Editing by James Thornhill & Ian Geoghegan) ($1=1.397 Australian Dollar)

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