Lehman escapes penalties in CIFH case

Lehman Brothers narrowly avoids having to make a compulsory cash offer to buy Citic International Financial Holdings after internal muddles incur the wrath of the Hong Kong regulator.
A fine mess was mopped up this week as Hong KongÆs Securities and Futures Commission passed down its judgment on an extraordinary sequence of recent events concerning Citic International Financial Holdings (CIFH) and its banking advisors Lehman Brothers.

In late 2007 and early 2008 Lehman had made a number of proposals to the Citic Group concerning the privatisation of its listed subsidiary CIFH.

The terms featured a significant increase in Banco Bilbao Vizcaya ArgentariaÆs stake in CIFH, and the shares were suspended on June 3. Lehman was formerly retained as adviser on June 10 and the shares started trading again on the June 11.

At that point, Lehman should have stopped proprietary trading in CIFH shares, because of possession of insider information and the conflict of interest in acting as advisor. However, that didnÆt happen. In the following five business days, Lehman-generated turnover accounted for a small proportion of the 190 million shares traded in CIFH during that week (the lowest daily volume in that period was 26 million shares).

This left Lehman in potentially hot water, with a technical requirement of the Code of Takeovers and Mergers stating that, as a result of their actions, they themselves should now make a cash offer for the company.

The SFC comments in a report:

ôBy its own admission and to its regret, LehmanÆs performance in this matter fell short of the standards expected by its clients, its regulators and also itself. It appears that the Lehman group was simply unprepared. It had never in its recall acted in this capacity in Hong Kong, it did not appear to be in a position to collate the relevant information on derivative and other outstanding commitments within a reasonable time frame, restricted dealing procedures were untried, systems were inadequate and traders were not properly trained in advance of the imposition of dealing restrictions. Had Lehman applied for and received exempt trader status, this embarrassment is likely to have been avoided.ö

Lehman was not forced into buying CIFH, and there was a sense of official acceptance that this all happened because of internal snafus, rather than any intentional act of malfeasance. Let this be a valuable lesson to all investment banks.

One hedge fund manager familiar with the situation believes the absence of penalties was meant to ensure Citic was not harmed, rather than to protect Lehman.

Lehman Brothers declined to comment.
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