HK suspends UBS sponsor license, fines it and others $100 million for IPO failures

HONG KONG (Reuters) - Hong Kong’s securities regulator banned UBS from leading initial public offerings (IPOs) in the city for a year, while fining it and rivals including Morgan Stanley a combined $100 million for due diligence failures on a series of IPOs.

FILE PHOTO: The logo of Swiss bank UBS is seen in Zurich, Switzerland October 25, 2018. REUTERS/Arnd Wiegmann/File Photo

UBS is the first major bank involved in stock listings to face such a suspension in the city. The $100.2 million in fines are the toughest actions yet taken by the regulator as part of its campaign against what it sees as shoddy listing standards.

The Securities and Futures Commission (SFC) on Thursday fined Swiss giant UBS HK$375 million ($48 million). It fined Morgan Stanley HK$224 million, Merrill Lynch HK$128 million and Standard Chartered (StanChart) HK$59.7 million, all for failures when sponsoring, or leading, IPOs.

Helping firms to list is big business in Hong Kong, which was last year’s top IPO destination worldwide with $36.3 billion raised, according to Refinitiv data.

But, in the wake of a slew of scandals among newly traded firms earlier this decade, the SFC has been cracking down on banks not properly carrying out their duties as sponsor.

Hong Kong IPOs need at least one sponsoring bank, which typically takes the lead in running the IPO and collects a larger proportion of fees than banks listed only as bookrunners.

Sponsors must conduct due diligence to assess the company being listed, and are responsible for assuring potential investors that its IPO prospectus is accurate.

The IPOs in question were those of China Forestry, sponsored by UBS and Standard Chartered, and Tianhe Chemicals, sponsored by UBS, Merrill Lynch and Morgan Stanley.

UBS was also fined for failing to discharge its duties in a third IPO which the regulator did not name, but which sources have identified as China Metal Recycling (CMR), a now-defunct scrap merchant.

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“The outcome of these enforcement actions for sponsor failures ... 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,” said Ashley Alder, chief executive of the SFC, in a statement.


Fines in Hong Kong are based on up to three times the fees or profits made by the regulated group or person, less a discount for cooperation with the investigation. Morgan Stanley was fined more than Bank of America Merrill Lynch by the regulator because it took more of the fees from Tianhe for the IPO.

China Forestry raised $216 million in its 2009 IPO. Just 14 months after listing, trading of its shares was suspended when its auditor discovered irregularities. The company was subsequently liquidated.

Tianhe, engaged in the manufacture and sale of chemical products, listed in 2014 but was soon after targetted by a short seller, who claimed it had inflated profits and presented related groups as customers. The company denied the allegations.

Trading in its shares has been suspended since 2015.

Among the failings described by the regulator was one instance where none of the three banks sponsoring Tianhe Chemical’s IPO followed up after interviewing the company’s largest customer as part of their sponsor due diligence.

The meeting was arranged by Tianhe at its offices and the customer, named only as X, refused to give a business card or provide other identification to the banks’ representatives before storming out of the meeting.

In the case of China Forestry, the SFC said UBS did not inspect any of the company’s forests after joining StanChart as a co-sponsor of the deal. While StanChart had visited some of the company’s forests, it failed to check the location of those sites against the locations given in the prospectus.

“We’ve seen this before in the accounting profession with the challenges to auditor scepticism. In some ways this is a similar situation for investment banks. The question now is has the industry moved on sufficiently from these failures,” said one Hong Kong-based finance expert, who declined to be named because he was not authorized to speak on the subject.

The SFC also on Thursday suspended the license of UBS banker Cen Tian for failing to discharge his duties as sponsor principal in charge of the IPO of China Forestry, it said.

Cen did not respond to an emailed request for comment.


“UBS takes note of the findings of the Hong Kong Securities and Futures Commission’s (SFC) investigations. We are pleased to have resolved these legacy issues relating to our Hong Kong IPO sponsorship license. We look forward to continuing to service our clients in Hong Kong,” UBS said in a statement.

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

“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),” StanChart said in a statement.

StanChart closed its equity business in 2015.

(This version of the story has been refiled to add dropped word ‘million’ regarding StanChart fine in paragraph 3)

Reporting by Alun John, Additional reporting by Anshuman Daga; Editing by Jennifer Hughes, Muralikumar Anantharaman and Mark Potter