In a case reminiscent of Canada’s Sino-Forest scandal, regulators in Hong Kong have imposed almost HK$800 million (C$133 million) in fines and other sanctions on several major investment banks for failing to carry out adequate due diligence on companies raising money on its markets.
The Hong Kong Securities and Futures Commission (SFC) announced a series of enforcement actions against four big investment firms on Thursday for failing to carry out their duties as sponsors of listing firms.
The regulator fined UBS AG and UBS Securities Hong Kong Ltd. HK$375 million and suspended its license to sponsor exchange listings for a year. It also fined Morgan Stanley Asia Ltd. HK$224 million, Merrill Lynch Far East Ltd. HK$128 million and Standard Chartered Securities (Hong Kong) Ltd. HK$59.7 million.
“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,” Ashley Alder, chief executive of the SFC, said in a statement.
In the case of UBS, the penalties stem from its failings as a sponsor of three listing applications: China Forestry Holdings Company Ltd., Tianhe Chemicals Group Ltd. and another, unnamed firm. The cases against Morgan Stanley and Merrill Lynch also relate to Tianhe, and the Standard Chartered action involves China Forestry.
The SFC said its investigation found that UBS “failed to make reasonable due diligence inquiries in relation to a number of core aspects of China Forestry’s business,” including failing to properly verify its forestry assets, logging activities, insurance coverage and customers.
The cases recall similar issues faced by Canadian underwriters and auditors, including the collapse of Sino-Forest Corp. in 2012, which led to regulatory sanctions, investor lawsuits and an Ontario Securities Commission (OSC) review of emerging market issuers. Among other things, that report found weaknesses in firms’ due diligence efforts involving overseas issuers, and called for improvements by underwriters, auditors, exchanges and issuers themselves.