The political scandal and criminal investigation that has accompanied the shutdown of the Hong Kong Mercantile Exchange has created more drama than the exchange ever did trading gold and silver futures.

Updated May 30, 2013, 2:21 p.m. ET

Inquiry Into Bourse Widens

Sixth Person Arrested Amid Closure of the Hong Kong Mercantile Exchange

By TE-PING CHEN

HONG KONG—The political scandal and criminal investigation that has accompanied the shutdown of the Hong Kong Mercantile Exchange has created more drama, including a sixth arrest on Thursday, than the small, struggling exchange ever did trading gold and silver futures.

The exchange’s closure after two years of trading was a blow to the ambitions of its backers, including a close ally to Hong Kong’s top official and Russian billionaire Oleg Deripaska, whose EN+ Group took a 10% stake in the exchange to help launch it in 2010. They had hoped the HKMEx would capitalize on China’s voracious appetite for commodities, but it failed to survive stiff competition from better-established players in Hong Kong and Shanghai, as well as in the West.Thursday’s arrest is the latest development in a widening probe that surfaced May 21, when the Hong Kong Securities and Futures Commission said it was investigating suspected “serious” irregularities at the exchange. Police took into custody a 76-year-old man on suspicion of using false instruments.

Of the six people arrested, police have charged three mainland Chinese men with possession of falsified bank statements. No other suspects have been charged. The exchange has said none of the people charged—Dai Linyi, Li Shanrong and Lian Chunyan—were its employees.

The men remained in custody Thursday; it wasn’t clear if they had lawyers. A bail hearing is scheduled for Friday.

HKMEx Chairman and political heavyweight Barry Cheung is under police investigation as part of the probe of the exchange, the police said May 24, days after HKMEx said it was shutting down because it lacked the revenue needed to cover its costs.

Mr. Cheung, who led Hong Kong Chief Executive Leung Chun-ying’s successful election bid last year, has denied any wrongdoing. Tuesday, he declined to comment on the case, saying he chose not to speak while the police investigation is continuing. He has resigned from all his public positions, including his role as an adviser in Mr. Leung’s cabinet, according to the government. Mr. Cheung also resigned from the boards of Hong Kong-based insurer AIA Group Ltd. 1299.HK +0.73% and Mr. Deripaska’s United Rusal Co., where he was once chairman.

Rusal, Mr. Deripaska and EN+ declined to comment on Mr. Cheung or on the HKMEx. AIA would only confirm that Mr. Cheung had departed from its board. Mr. Leung didn’t respond to a request for comment.

The investigation of Mr. Cheung has dominated media coverage in Hong Kong, and prompted public questioning of the administration by legislators. Lawmakers demanded to know how long the administration knew of the exchange’s difficulties, but the government has declined to comment, citing the investigation.

Mr. Cheung is the third key member of Mr. Leung’s administration to step down in the face of a public outcry since the leader took office last July. Public approval ratings for Mr. Leung, who has never enjoyed strong relations with the city’s business elite, have fallen. While in other elections the city’s tycoons have rallied around the candidate backed by Beijing, that broad support never emerged for Mr. Leung.

For HKMEx, early hopes that it would get Chinese regulatory approval to trade contracts for fuel oil that could be delivered on the mainland never materialized, dealing a blow to its business plans. Though it was slated to begin operating in 2009, HKMEx struggled to take off, in part because of the global financial crisis and difficulty in assembling shareholders.

Prior to its launch, Mr. Cheung said the exchange would fill a key market niche in Asia by giving local companies and investors the ability to trade during the Asian day, rather than at night, when markets in Europe and the U.S. are open. He cited China’s “insatiable” demand for commodities such as copper and iron as an opportunity for the exchange.

HKMEx’s ambitions suffered a further blow last year, when the Hong Kong stock exchange moved into commodities trading, buying the London Metal Exchange, the world’s biggest trading platform for industrial metals, for US$2.16 billion.

Since it opened in 2011, HKMEx only ever offered two products: futures contracts for gold and silver, denominated in U.S. dollars. Its business lagged relative to its rivals, with turnover between 2011 and 2013 totaling US$120 billion, mostly in gold trades.

By contrast, the Shanghai Futures Exchange, which handles a number of commodities, traded US$653 billion in gold in 2012 alone. On May 18, when HKMEx said that it had stopped trading, it had only 180 outstanding contracts left to settle.

Brokers said this week that HKMEx’s lack of offerings had left them disappointed over the years. “Initially of course, we expected that their contracts would cover various products. But it turns out that was just something like wishful thinking,” said Ben Kwong, chief operating officer at brokerage KGI Asia Ltd., an HKMEx member, adding that his company had only completed a few trades for test purposes.

“Our clients preferred to trade through other platforms that they found more efficient, with more liquidity,” Mr. Kwong said.

The exchange struggled to gain traction in an already crowded field of competitors, including well-established rivals in Chicago and London, as well as counterparts in Singapore, Shanghai and Hong Kong.

“In the region, when you talk about gold or silver, in China they were facing competition with the Shanghai Futures Exchange, and over here, they were facing us,” says Haywood Cheung, president of the century-old Hong Kong-based Chinese Gold & Silver Exchange Society, which daily handles some US$10.3 billion in spot gold trading. It had recently been in talks about forging a partnership with HKMEx.