Hong Kong regulator imposes $27m fine on China Merchants Securities for sponsor failures


The action follows the SFC’s earlier sanction against the other joint sponsor – UBS, for its failures in relation to the listing application of China Metal and two other companies.

Hong Kong’s Securities and Futures Commission (SFC) today announces the imposition of $27 million fine on China Merchants Securities (HK) Co., Limited (CMS) over sponsor failures. 

This marks the latest such move by the regulator – let’s recall that, in March this year, the SFC slapped a HK$375 million fine on UBS AG and UBS Securities Hong Kong Limited for failing to discharge their obligations as one of the joint sponsors of three listing applications: China Forestry Holdings Company Limited, Tianhe Chemicals Group Limited, and another listing application – that of China Metal Recycling (Holdings) Limited.

Today’s action has to do with the latter listing application. CMS has been reprimanded and fined over its failure to discharge its obligations as a joint sponsor in relation to China Metal. The disciplinary action followed the SFC’s earlier sanction against the other joint sponsor – UBS AG and UBS Securities Hong Kong Limited – for their failures in relation to the listing application of China Metal and two other companies.

The SFC has found that CMS and UBS had respectively failed in their due diligence as joint sponsors to address a number of unusual facts and findings on China Metal and its customers during the listing process.

For instance, before the filing of the first listing application of China Metal on June 2, 2008, UBS discovered that one of the largest Mainland customers of China Metal, Company A, had been deregistered since March 2007 but it continued to enter into sales contracts with China Metal or its subsidiary thereafter.

Despite a number of red flags raised in its due diligence, UBS accepted China Metal’s explanation that Company B, whose beneficial owner was the same as Company A, had entered into contracts with China Metal in the name of Company A since its deregistration, and Company B was eventually described as one of China Metal’s largest customers in documents submitted to the Stock Exchange of Hong Kong (SEHK) and in China Metal’s prospectus dated 10 June 2009.

Although CMS only became a joint sponsor of China Metal in or around November 2008, and was not involved in the due diligence conducted prior to November 2008 on this issue, it had an independent duty to conduct due diligence in order to have a thorough knowledge and understanding of China Metal and to satisfy itself in relation to the information disclosed in the prospectus, the SFC notes. The regulator considers that the evidence suggests that CMS had not taken any steps to conduct follow up due diligence on this issue.

Further, UBS interviewed all suppliers of China Metal by telephone, and CMS also interviewed two suppliers by telephone before the filing of China Metal’s second listing application, but there is no evidence that they had verified the telephone numbers and/or the identities of the supplier representatives they interviewed.

In determining the penalty in the CMS case, the SFC has taken into account various factors, including, inter alia, that CMS had assisted the listing of a company that was not suitable for listing and that CMS cooperated with the SFC in accepting the disciplinary actions and the SFC’s regulatory concerns.

CMS agreed to engage an independent reviewer to review its policies, procedures and practices in relation to the conduct of its sponsor business.



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