SFC slaps banks with huge fines for DD failures

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UBS, Morgan Stanley and Standard Chartered, as well as Merrill Lynch, were hit with a total $100m in fines for lapses in due diligence related to Hong Kong stock market listings.

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Fines for UBS, Morgan Stanley, Standard Chartered and Merrill Lynch totalled HK$786.7m ($100m), according to separate statements from Hong Kong’s Securities and Futures Commission.

UBS (UBS AG and UBS Securities) was reprimanded and fined HK$375m ($48m) “for failing to discharge their obligations as one of the joint sponsors of three listing applications” which were China Forestry, Tianhe Chemicals and a third undisclosed company.

The licence of UBS Securities Hong Kong to advise on corporate finance was also suspended for one year and the licence of Cen Tian for two years “for failing to discharge his supervisory duties as a sponsor principal in charge of supervision of the execution of China Forestry’s listing application”, the regulator said.

Morgan Stanley was fined HK$224m and reprimanded for “for failing to discharge its obligations as one of the joint sponsors” of Tianhe’s listing application.

“The SFC’s investigations revealed that Morgan Stanley had failed to follow the specific guidelines on due diligence interviews,” according to the regulator’s statement.

Standard Chartered Securities in Hong Kong (formerly known as Cazenove Asia) was fined HK$59.7m “for failing to discharge its obligations as one of the joint sponsors” for China Forestry’s listing application in 2009.

The firm was cited for “failure to verify the existence of China Forestry’s forestry assets.

“The deficiencies in the due diligence conducted by Standard Chartered Securities are significant, i.e. it has failed to properly examine and verify crucial aspects of China Forestry’s business – namely, its forestry assets, logging activities, insurance coverage and customers.”

Finally, SFC reprimanded and fined Merrill Lynch Far East HK$128m also “for failing to discharge its obligations as one of the joint sponsors” of Tianhe’s listing application.

“The SFC’s investigations revealed that Merrill Lynch had failed to follow the specific guidelines on due diligence interviews”, the statement said.

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

The companies under fire

China Forestry was listed in Hong Kong in 2009. Trading in shares was suspended in 2011 and the company was delisted in 2017. The SFC has alleged that turnover and assets were grossly overstated.

“The scope of the allegedly false or misleading information as disclosed by China Forestry was extensive, covering the company’s turnover generating activities, profit, plantation assets and cash balances, etc,” the SFC said in an earlier statement.

Tianhe Chemicals Group was listed in Hong Kong in 2014. The same year, it was critcised by short-seller Anonymous Analytics of overstating sales and profit and underpaying taxes, allegations the company denied.

Tianhe requested a trading halt in its shares in March 2015 due to a delay in the publication of its 2014 annual results and the company launched an investigation into audit issues at the time. In 2017, the SFC ordered the suspension of all dealings in shares of Tianhe and trading remains suspended today.

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