Negligent IPO sponsors slapped with record fines

The Securities and Futures Commission has reprimanded UBS, Morgan Stanley, Merrill Lynch and Standard Chartered and fined them HK$786 million, a record amount, for failing to carry out responsibilities as IPO sponsors.

Reuters, Bloomberg and Tereza Cai

Friday, March 15, 2019

The Securities and Futures Commission has reprimanded UBS, Morgan Stanley, Merrill Lynch and Standard Chartered and fined them HK$786 million, a record amount, for failing to carry out responsibilities as IPO sponsors.

UBS had its license revoked for a year.

UBS was fined the most, HK$375 million, as it is related to three listing applications - China Forestry, Tianhe Chemicals and another firm, reportedly China Metal Recycling. The SFC did not name it as the investigation is ongoing.

UBS Securities HK cannot act as a sponsor for listing applications on the Stock Exchange of Hong Kong of any securities, and managing director Tim Cen Tian had his Hong Kong license suspended for two years.

Standard Chartered was fined HK$59.7 million for mismanaging in the case of China Forestry, while Merrill Lynch Far East was fined HK$128 million and Morgan Stanley Asia HK$224 million for failing in their duties in the case of Tianhe Chemicals.

China Forestry was listed on the Main Board on December 3, 2009, raising US$216 million.

Trading in the shares of China Forestry was suspended on January 26, 2011, after auditor KPMG discovered financial irregularities. It was wound up and the listing was canceled on February 24, 2017.

UBS and Standard Chartered, as its joint sponsors, were accused by the SFC of failure to verify the existence of China Forestry's forestry assets and its forestry rights, and its compliance with laws and regulations.

They were accused of inadequate due diligence on insurance cover for the group's forestry assets, and the SFC found that they called the customers on telephone numbers provided by China Forestry without conducting any background searches on the customers to verify their telephone numbers and/or the identities of the individuals interviewed.

Merrill Lynch and Morgan Stanley were the sponsors of Tianhe Chemicals, which listed in 2014, raising US$650 million.

Shortseller Anonymous Analytics attacked Tianhe Chemicals in September, 2014, only three months after its IPO, alleging the company was worth zero.

Tianhe Chemicals suspended trading in March, 2015, and its auditor Deloitte resigned.

Before its listing, Tianhe Chemicals sparked discussion in January, 2014, on news that investment banks were eager to hire Joyce Wei Jiao, the daughter of Tianhe Chemicals chairman Wei Qi, in a bid to be the sponsor of the company's IPO.

Ashley Alder, SFC chief executive, said: "The outcome of these enforcement actions for sponsor failures - particularly failings when conducting IPO due diligence - signify 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.

"The sanctions send a strong and clear message to the market that we will not hesitate to hold errant sponsors accountable for their misconduct," he said on UBS.

UBS said in a statement: "UBS takes note of the findings of the Hong Kong Securities and Futures Commission's investigations. We are pleased to have resolved these legacy issues relating to our Hong Kong IPO sponsorship license. We look forward to continuing to serve our clients in Hong Kong."

Morgan Stanley and Bank of America Merrill Lynch declined to comment.

Stanchart said: "We welcome the opportunity to resolve this case with the SFC, which stems from matters arising over 10 years ago.

"We note that on 8 January 2015, Standard Chartered Group announced the closure of institutional cash equities, equity research and equity capital markets activities (including IPO sponsor activities)."

A record 192 companies went public in Hong Kong last year, data compiled by Bloomberg show. Morgan Stanley ranked fourth among underwriters, while UBS was eighth and Bank of America came in at No 15. Chinese investment banks took the top three slots.