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March 15, 2019

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HK regulator hits UBS, rivals over IPO mishandling

Hong Kong’s securities regulator banned Swiss giant UBS from leading initial public offerings in the city for a year and fined it and rivals including Morgan Stanley a combined US$100 million for due diligence failures on a series of IPOs.

UBS is the first major bank involved in stock listings to face such a suspension in the city. The US$100.2 million in fines are the toughest actions yet taken by the regulator as part of its campaign against what it sees as shoddy listing standards.

The Securities and Futures Commission yesterday fined UBS HK$375 million (US$48 million). It fined Morgan Stanley HK$224 million, Merrill Lynch HK$128 million and Standard Chartered HK$59.7, all for failures when sponsoring, or leading, IPOs.

Helping firms to list is big business in Hong Kong, which was last year’s top IPO destination worldwide with US$36.3 billion raised, according to Refinitiv data.

But, in the wake of a slew of scandals among newly traded firms earlier this decade, the SFC has been cracking down on banks not properly carrying out their duties as sponsor.

Hong Kong IPOs need at least one sponsoring bank, which typically takes the lead in running the IPO and collects a larger proportion of fees than banks listed only as bookrunners.

Sponsors must conduct due diligence to assess the company being listed, and are responsible for assuring potential investors that its IPO prospectus is accurate.

The IPOs in question were those of China Forestry, sponsored by UBS and Standard Chartered, and Tianhe Chemicals, sponsored by UBS, Merrill Lynch and Morgan Stanley.

UBS was also fined for failing to discharge its duties in a third IPO which the regulator did not name, but which sources have identified as China Metal Recycling, a now-defunct scrap merchant.

“The outcome of these enforcement actions for sponsor failures ... signifies the crucial importance that the SFC places on the high standards of sponsors’ conduct to protect the investing public and maintain the integrity and reputation of Hong Kong’s financial markets,” said Ashley Alder, chief executive of the SFC, in a statement.

Fines in Hong Kong are based on up to three times the fees or profits made by the regulated group or person, less a discount for cooperation with the investigation.

China Forestry raised US$216 million in its 2009 IPO. Just 14 months after listing, trading of its shares was suspended when its auditor discovered irregularities. The company was subsequently liquidated.

Tianhe, engaged in the manufacture and sale of chemical products, listed in 2014 but was soon after targeted by a short seller, who claimed it had inflated profits and presented related groups as customers. The company denied the allegations.

Trading in its shares has been suspended since 2015.

Among the failings described by the regulator was one instance where none of the three banks sponsoring Tianhe Chemical’s IPO followed up after interviewing the company’s largest customer as part of their sponsor due diligence.

The meeting was arranged by Tianhe at its offices and the customer, named only as X, refused to give a business card or provide other identification to the banks’ representatives before storming out of the meeting.


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