Employees pass between offices as UBS Group AG logo sits on a walkway at the UBS headquarters in Zurich, Switzerland. (Photographer: Stefan Wermuth/Bloomberg)

UBS and Rivals to Pay $100 Million to Settle Hong Kong IPO Cases

(Bloomberg) -- International banks including UBS Group AG and Morgan Stanley agreed to pay a combined HK$787 million ($100 million) to settle cases brought by Hong Kong authorities relating to their work on initial public offerings in the city.

Bank of America Corp. and Standard Chartered Plc were also fined, the Securities and Futures Commission said in a statement on Thursday. UBS, which faced the largest penalty, HK$375 million, will also be banned from sponsoring IPOs for 12 months, the SFC said. Managing Director Cen Tian, also known as Tim Cen, had his Hong Kong license suspended for two years.

The settlements bring an end to multiyear investigations by the financial regulator, which has been increasing its efforts to clean up Hong Kong’s capital markets. The collapse of several high-profile companies shortly after their trading debuts left investors with losses and dented the city’s reputation as a premier financial hub. The SFC is probing other IPOs, its enforcement chief has previously said.

Each bank’s total penalties:

  • UBS: HK$375 million
  • Morgan Stanley: HK$224 million
  • Bank of America: $128 million
  • Standard Chartered: HK$59.7 million

Hong Kong’s sponsor regime makes banks and brokerages liable for what’s said in a company’s prospectus, and they’re also required to ensure stated accounts are accurate. The rules are designed to strengthen accountability in a city that sees a large percentage of IPOs from offshore entities outside the SFC’s jurisdiction.

“The sanctions send a strong and clear message to the market that we will not hesitate to hold errant sponsors accountable for their misconduct,” Ashley Alder, SFC chief executive officer, said in the statement.

Notable SFC fines

July 2018CCB International Capital was fined HK$24 million for sponsor failure 
May 2018SFC imposed a HK$57 million fine on Citigroup Inc. for IPO due diligence flaws
February 2018Credit Suisse Group AG was handed HK$39 million in penalties for various internal control failures spanning a 14 year period 
November 2017HSBC Holdings Plc’s private banking unit was hit with a record punishment of HK$400 million over structured-product sales linked to Lehman Brothers

The fines were related to the IPOs of China Forestry Holdings Co., Tianhe Chemicals Group Ltd. and a third company that the SFC didn’t name. Each had their shares suspended soon after going public amid scrutiny of their financial accounting.

Standard Chartered and UBS were joint sponsors of China Forestry’s 2009 IPO, which raised $216 million. The stock was suspended in 2011 after financial irregularities were discovered, and the company is now in liquidation. Cen’s license was revoked for failing to discharge his supervisory duties relating to the deal, the SFC said. Among the bank’s errors was a failure to verify China Forestry’s legal rights over forests it claimed to control, according to the regulator.

UBS, Bank of America and Morgan Stanley were joint sponsors on the 2014 IPO of Tianhe Chemicals. The company’s shares haven’t traded since 2015, a year after a short seller’s accusations against the business sent its stock tumbling.

UBS also settled for its role as joint sponsor of China Metal Recycling Holdings Ltd.’s 2009 debut, according to people familiar with the matter. The SFC said that one of the deals it had settled with UBS couldn’t be named because disciplinary proceedings against other parties involved in the IPO hadn’t concluded.

UBS and Rivals to Pay $100 Million to Settle Hong Kong IPO Cases

The widely publicized implosions of several Chinese companies traded in Hong Kong underscored an uncomfortable side of the city’s role as a fundraising center for Chinese businesses: The companies are based outside the financial regulator’s purview, leaving investors in Hong Kong vulnerable to accounting frauds. Unlike in the U.S., Hong Kong doesn’t have a class-action system allowing disgruntled investors to team up and take companies to court.

In 2013, the SFC changed its rules to make underwriters more explicitly accountable for the quality of IPOs, and it has warned firms that they can be held criminally liable for the accuracy of share-sale prospectuses. The regulator also asked banks to improve their underwriting standards and ask tougher questions when examining the accounts of would-be applicants.

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, the data show. Chinese investment banks took the top three slots.

©2019 Bloomberg L.P.