Hong Kong Regulator Drops Lawsuit Against UBS, Standard Chartered Over 2009 IPO

By Julie Steinberg Features Dow Jones Newswires

Hong Kong's securities regulator has dropped a lawsuit against UBS Group AG and Standard Chartered PLC over the banks' conduct in a 2009 initial public offering of a Chinese timber firm now in liquidation, according to people familiar with the matter.

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The Securities and Futures Commission isn't proceeding with a writ that had alleged market misconduct against the two banks, and which could have required them to compensate investors for losses, the people said. The move represents a small victory for the banks, but they could still face financial and other penalties from the regulator, the people added.

The regulator in January sued UBS, Standard Chartered and accounting firm KPMG, alleging they mishandled the 2009 initial public offering of China Forestry Holdings Co., an operator of forestry plantations that subsequently disclosed accounting irregularities and has since been delisted. UBS and Standard Chartered were the so-called sponsors on the deal. Sponsors on Hong Kong IPOs manage the listing process and conduct due diligence on the companies they take public.

It is unclear whether the lawsuit against KPMG has also been dropped. The SFC had also sued China Forestry and two of its executives.

"After considering its legal position, the SFC determined that its action against certain parties was probably time-barred," a spokesman for the regulator said. The statute of limitations for such cases is generally six years.

Spokesmen for UBS and Standard Chartered declined to comment. A spokeswoman for KPMG couldn't immediately be reached for comment.

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The action follows months of negotiations between UBS and the Hong Kong regulator over potential penalties, according to people familiar with the situation. UBS earlier said it could temporarily lose its ability to advise on IPOs in Hong Kong. The Swiss bank is still the subject of at least two other investigations, including ones connected with the 2009 IPO of China Metal Recycling (Holdings) Ltd. as well the 2014 IPO of Chinese chemicals firm Tianhe Chemicals Group Ltd., according to people familiar with the matter.

China Forestry, a company originally backed by U.S. private-equity firm Carlyle Group, raised $216 million in its Hong Kong IPO in late 2009. Its shares were suspended just over a year later after the company's auditors found irregularities in its books. China Forestry's former chief executive was arrested in February 2011 by Chinese authorities, who alleged he embezzled money from the company. The shares were delisted in February this year and the company is being liquidated.

Hong Kong regulators are still pursuing other cases of alleged misconduct. Just two days ago, the regulator's enforcement head said it was probing 15 financial firms for "substandard work" managing IPOs.

Bankers and lawyers say the regulator faces a tough task finding the balance between maintaining the integrity of Hong Kong's market while keeping intact its reputation for attracting top-tier global banks. Some industry participants say incurring heavy penalties or suspensions for their work on IPOs could encourage firms to look elsewhere to station their teams. Arranging IPOs has long been a revenue booster for Western banks in Asia.

Write to Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

October 13, 2017 08:08 ET (12:08 GMT)