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SINGAPORE, Aug 1 (Reuters) - Hong Kong's securities regulator has taken one of its most draconian actions ever and asked the courts to liquidate a listed company, a move that could be the first of several as the watchdog hardens its stance against alleged market misconduct.
The Securities and Futures Commission (SFC) says it has evidence that China Metal Recycling, a $1.43 billion company that describes itself as China's largest recycler of scrap metal, exaggerated its financial position when it listed in Hong Kong in 2009.
The case, which comes up for its next hearing in Hong Kong on Friday, underscores the SFC's resolve to restore investor confidence to what was the world's busiest IPO market at a time when offerings have dried up due to volatile trading conditions, China's waning economic growth and regulatory concerns.
But the crackdown has also rattled Hong Kong's investment bankers, who could face legal action if they are found to have missed clear evidence of accounting frauds at companies they helped to go public in the city.
"There's been continual hard talking from the SFC about how it intends to crack down on any activities that cast the market here in a bad light and it's living up to those words now," said Gareth Hughes, a partner at Ashurst law firm in Hong Kong.
In court, the SFC will go up against China Metal Recycling's management to argue that provisional liquidators, who have already been appointed, should take control of the company to try and recover as much value as possible for shareholders.
China Metal Recycling's shares were suspended in January after concerns were first raised about accounting issues. Lawyers say several other companies are also in a similar situation, raising the prospect of another SFC crack down.
"There are a number of other companies in the same position of having been suspended amid concerns over financial irregularity and shareholders of those companies may be concerned that similar action might be taken against those companies," said David Lee, a partner at Norton Rose Fulbright law firm.
China Metal Recycling did not return calls asking for comment. Wellrun Ltd, the company's largest shareholder, has said it does not believe the SFC's winding up application is in the interests of its shareholders.
Wellrun Ltd's beneficial owner is China Metal Recycling Chairman and Chief Executive Chun Chi Wai.
China Metal Recycling's listing raised HK$1.55 billion ($200 million). UBS AG was the initial public offering's sole global coordinator and a joint-sponsor with China Merchants Securities (HK). Deloitte Touche Tohmatsu acted as auditor.
The SFC said it has found evidence the company inflated the size of the business and the amount of revenue generated by its major subsidiary.
UBS declined to comment on its role in the listing. China Merchants Securities did not respond to emails seeking comment.
Deloitte said it was not at fault. "The SFC's appointment of provisional liquidators is to take administrative control away from the company's management and board, and there is no suggestion of any fault on the part of the auditors," the accounting firm said in a statement.
Lawyers say that if the provisional liquidators are allowed to take control of the company, they will then conduct their own investigation and could take legal action if they find evidence that anyone involved in the listing process misled investors.
"To the extent they discover anyone guilty of improper conduct and bringing the company down, I'm sure they will be taking action accordingly," said Kingsley Ong, partner at Eversheds law firm.
Bankers in Hong Kong are already cautious about how they handle IPOs after SFC Chief Executive Ashley Alder bought in new rules that make them liable for defective listing prospectuses.
"Are we worried? It's never good when you have a regulator who wants to make an example or examples out of bankers that have not done their job," said a Hong Kong-based investment banker who declined to be named as they are not authorised to speak to the media.
"Some banks that haven't done a good job historically staffing analysts and associates on the execution process are going to have to change the way to do things," the banker said.
Lawyers in the city have expressed concern that the SFC sometimes circumvents traditional legal processes by taking action against companies and individuals before any wrong-doing has been formally proved by a market misconduct tribunal.
The SFC disputes this, saying they are using powers granted to them under the city's securities law and that their approach is the best way to ensure those who have suffered damages get at least part of their money back.
$1 = 7.7555 Hong Kong dollars Additional reporting by Elzio Barreto, Anne Marie Roantree, Brian Yapin in HONG KONG; Editing by Denny Thomas and Miral Fahmy