Hong Kong regulator cracks down in wake of IPO fiascos

Milestone action, including fines totalling $100 million, against UBS, StanChart, Morgan Stanley and Merrill Lynch, come as city battles to maintain its cachet as a listing destination.

Beware the Ides of March, William Shakespeare once wrote. Beware its eve also, some investment banks in Hong Kong could be forgiven for thinking after the city's securities regulator slapped down no less than four international operators in one day.

In a landmark move on Thursday, Hong Kong’s Securities and Futures Commission (SFC) fined UBS and Standard Chartered a total of HK$435 million ($55 million) and banned the former from sponsoring initial public offerings (IPOs) for a year due to “extensive’’ due diligence failings.

It also came down hard on Morgan Stanley and Bank of America's Merrill Lynch Far East Limited for their perceived failings on one of these dodgy deals, fining the US banks a further HK$224 million and HK$128 million, respectively.

The two-pronged move against UBS and Standard Chartered is linked to a series of share sales that took place several years ago.

In the case of UBS, their botched sponsorship of three listings – China Forestry, Tianhe Chemicals and another firm that was not named for legal reasons – saw regulators fine the Swiss bank HK$375 million. The third firm is thought to be China Metal Recycling.

But it is the ban that will likely hurt the Swiss bank most, given the fees that can accrue from IPO sponsorship and the low profile it has already kept since the SFC first announced its probe in 2016.

UBS was fined HK$119 million and hit with an 18-month ban in March 2018 but had said it would appeal the decision. 

Sponsors typically hoover up the vast majority of underwriting fees on IPOs, for which Hong Kong is the world's biggest market.  

The regulator said the licence of UBS banker Cen Tian was also suspended for two years for failing to discharge his duties as sponsor principal in charge of the 2009 China Forestry IPO, while Standard Chartered was fined HK$59.7 million for its failings as a joint sponsor on the same deal.

Trading in China Forestry's shares was suspended in January 2011 due to accounting irregularities, some 14 months after they listed, and the company was subsequently wound up.

In addition, Morgan Stanley and Merrill Lynch were reprimanded for their failure to carry out appropriate due diligence in relation to the listing of Tianhe Chemicals. Both failed to check up sufficiently on Tianhe's customer firms, despite the red flags thrown up during the process, the SFC said. 

The SFC announcements, which the banks are describing as "settlements", come after FinanceAsia reported in March last year that UBS was facing a massive blow by regulators over their handling of IPOs.

Tianhe, which raised $654 million via an IPO in June 2014, was attacked by a short seller less than three months later claiming it had falsified some of its prospectus details. The company has denied the allegations but trading in its shares remains suspended.



IPO sponsorship can be lucrative but also carries with it the responsibility for reporting potential irregularities to the listing authorities, making for possible conflicts of interest. 

The latest wave of enforcement action, whilst a long time in coming, illustrates the balancing act the SFC has to play between maintaining Hong Kong’s attractiveness as a listing destination and its ability to impose proper standards of conduct in IPOs.

The city is more than keen to maintain its competitiveness as a listing venue, especially as mainland China – of which is a special administrative part – is currently working on new initiatives like the Shanghai technology board which is due to debut this spring.

In a statement issued following the SFC’s announcement, UBS said: “We are pleased to have resolved these legacy issues relating to our Hong Kong IPO sponsorship license. We look forward to continuing to service our clients in Hong Kong,”

Standard Chartered also welcomed the opportunity to resolve this long-running case and noted that it had shuttered its institutional cash equities, equity research and equity capital markets activities (including IPO sponsor activities) in 2015.

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