SFC fines UBS $375 million and suspends its licence for one year for sponsor failures
The Securities and Futures Commission (SFC) has reprimanded and fined UBS AG and UBS Securities Hong Kong Limited (UBS Securities Hong Kong) (collectively, UBS) a sum of $375 million for failing to discharge their obligations as one of the joint sponsors of three listing applications, namely, China Forestry Holdings Company Limited (China Forestry), Tianhe Chemicals Group Limited (Tianhe), and another listing application (the Other Listing Application) (Notes 1, 2 and 3).
The SFC also partially suspended UBS Securities Hong Kong’s licence to advise on corporate finance for one year, to the extent that UBS Securities Hong Kong shall not act as a sponsor for listing application on the Stock Exchange of Hong Kong Limited (SEHK) of any securities.
The SFC has also suspended the licence of Mr Cen Tian for two years from 14 March 2019 to 13 March 2021 for failing to discharge his supervisory duties as a sponsor principal in charge of supervision of the execution of China Forestry’s listing application (Note 4).
The SFC has today also taken action against other joint sponsors involved in the listing applications of China Forestry and Tianhe.
Sponsor failings in China Forestry’s listing application
The SFC’s investigations revealed that UBS had failed to make reasonable due diligence enquiries in relation to a number of core aspects of China Forestry’s business (Note 5).
(i) Failure to verify the existence of China Forestry’s forestry assets
According to China Forestry’s 2009 prospectus, the company and its subsidiaries (China Forestry Group), a plantation forest operator whose main businesses were the management and sustainable development of forests and the harvesting and sale of logs, owned approximately 171,780 hectares of forests in Yunnan and Sichuan Provinces of Mainland China.
UBS became a joint sponsor of China Forestry’s listing application in or around May/June 2009. However, UBS did not conduct any site inspection of China Forestry Group’s forests after it became a sponsor. Although UBS claimed that it had carried out physical inspections at a number of China Forestry Group’s forests in Sichuan and Yunnan in 2008 in its then capacity as one of the joint bookrunners, it was unable to provide any inspection records or identify the precise locations of the inspections.
UBS claimed that other professional parties, including lawyers and forestry experts, were involved in some of the site inspections. However, none of them had been instructed to verify the existence of China Forestry Group’s forests as disclosed in the prospectus.
Further, despite the fact that China Forestry Group acquired 150,000 hectares of forests in Yunnan in 2008 which accounted for over 90% of its forestry assets, there is no evidence to suggest that UBS visited China Forestry Group’s forests in Yunnan or commissioned any assessment of the impact of the earthquake of magnitude 6.0 on the Richter scale that hit Yunnan on 9 July 2009 on them.
(ii) Failure to verify China Forestry Group’s forestry rights
According to the prospectus, China Forestry Group’s legal rights over its forests were evidenced by the relevant forestry right certificates. While UBS claimed to have inspected the original certificates, it did not identify a number of apparent anomalies (such as, a mismatch between the name of a forest as disclosed in the prospectus and as stated in the corresponding certificates) that should have called for further inquiries.
UBS also claimed that its Mainland Chinese lawyers had verified and checked the certificates. However, this was not reflected in the relevant legal opinions.
In fact, the legal opinions contained express assumptions as to the genuineness and accuracy of documents China Forestry provided to the lawyers.
(iii) Failure to verify China Forestry’s compliance with relevant laws and regulations
UBS relied on written confirmations purportedly issued by the relevant forestry bureaus that China Forestry had provided for it to confirm that the business and logging activities of China Forestry were in compliance with the relevant Mainland Chinese forestry laws. There is, however, no evidence that UBS had verified whether the written confirmations were issued by the relevant forestry bureaus and that the information recorded therein was accurate.
(iv) Inadequate due diligence on insurance coverage for China Forestry Group’s forestry assets
Having sufficient insurance coverage for China Forestry Group’s forestry assets, which were pivotal to its business operation, was of fundamental importance. UBS relied on insurance documents provided by China Forestry as evidence of such insurance coverage without independently verifying the authenticity of the insurance documents.
Although UBS claimed that its deal team members and Mainland Chinese lawyers had reviewed the insurance documents, it did not identify a number of issues (such as, inconsistencies between the locations of certain forests as stated in the insurance documents and as disclosed in the prospectus) that should have called for further inquiries.
(v) Inadequate due diligence on China Forestry’s customers
Over 70% of China Forestry’s customers by revenue for the last 18 months during its track record period were located in Yunnan (Note 6). UBS had planned to conduct face-to-face interviews with some of China Forestry’s customers in Yunnan, but subsequently decided to postpone the face-to-face interviews because of the earthquake in Yunnan. UBS only conducted telephone interviews with these customers in the end.
The SFC found that UBS called the customers on telephone numbers provided by China Forestry without conducting any background searches on the customers to verify their telephone numbers and/or the identities of the individuals interviewed. The SFC also found that the records of the interviews were seriously inadequate.
The SFC also found that UBS’s failures in China Forestry’s listing application were attributable to the neglect on the part of Cen, in his capacity as a sponsor principal, of his supervisory duties (Note 7).
Sponsor failings in Tianhe’s listing application
The SFC’s investigations revealed that UBS, one of the joint sponsors in Tianhe’s listing application, had failed to follow the specific guidelines on due diligence interviews in paragraph 17.6 of the Code of Conduct (Notes 8, 9 and 10).
(i) Involvement of Tianhe in due diligence interviews
UBS had interviewed ten customers of Tianhe: six of which were interviewed either by telephone or at face-to-face interviews at Tianhe’s offices in Jinzhou of Mainland China, and the rest of them were interviewed at the customers’ own premises.
UBS did not have direct contact with the customers when they set up the interviews or confirmed the mode and place of the interviews. On the contrary, Tianhe took the lead in informing UBS which customers were unable to attend face-to-face interviews, and which customers refused to conduct interviews at their business premises. There is no evidence that UBS had taken any steps to check with the customers as to why they were not amenable to be interviewed at their offices.
(ii) Failure to address red flags raised in an interview
UBS had initially requested to interview the largest customer of Tianhe, Customer X, at its office, but they eventually accepted Tianhe’s explanation that since an anti-corruption campaign in Mainland China was underway, Customer X, a large state-owned enterprise, would normally turn down any third party request to visit its premises.
UBS then agreed to interview Customer X at Tianhe’s office. At the end of the interview, the representative of Customer X refused to produce his identity and business cards and stormed out of the meeting room. He told UBS that he would not have agreed to be interviewed under Customer X’s internal procedure, and he only attended the interview to help the family of Tianhe’s chief executive officer (CEO).
Nonetheless, UBS did not conduct any follow up inquiries to ascertain that the person it interviewed was the representative of Customer X and that he had the appropriate authority and knowledge for the interview.
(iii) Unclear interview questions
Tianhe conducted business with its customers through its subsidiary, Jinzhou DPF-TH Chemicals Co.
Limited (Jinzhou DPF-TH), based upon the sales documents provided to UBS.
During the customer interviews, UBS asked the interviewees questions in relation to the business between their companies and the “Tianhe Group”, instead of Jinzhou DPF-TH. Although the interviewees were also asked a question “which entity of the Tianhe Group and which business department do you mainly contact with”, only three out of ten customers interviewed confirmed that they had contact with Jinzhou DPF-TH. However, UBS did not follow up with the remaining customers as to which entity of the “Tianhe Group” they had business with.
One of the purported top ten customers of Tianhe interviewed by UBS informed the SFC that when its representative answered questions about the dealings between the customer and the “Tianhe Group” during the interview, its representative was referring to the dealings with Liaoning Tianhe Fine Chemicals, a private company wholly owned by the family of the CEO of Tianhe but no longer a part of Tianhe’s group to be listed at the material times.
As both the listed and unlisted chemical businesses of the family of the CEO of Tianhe were named “Tianhe”, the SFC considers that it was insufficient for UBS to merely refer to the “Tianhe Group” during customer interviews and/or not to request the interviewees to identify the exact Tianhe entity with which their organisations had dealings.
In deciding on the sanctions, the SFC took into account that:
- UBS’s sponsor failings concerned three listing applications, including China Forestry and Tianhe;
- the deficiencies identified in relation to UBS are extensive:
- UBS had failed to properly examine and verify the fundamental aspects of China Forestry’s business - namely, its forestry assets, logging activities, insurance coverage and customers; and
- UBS allowed Tianhe to control the due diligence process and failed to take appropriate steps to address the red flags raised in the customer interviews. In addition, the breaches and deficiencies identified above related to the due diligence conducted on Tianhe’s top customers, including its largest customer, during its track record period;
- sponsors have considerable control over the listing process. When sponsors perform substandard due diligence work and companies unsuitable for listing are nevertheless listed and eventually fail, their failure may cause enormous loss to public investors and jeopardise their confidence in Hong Kong’s financial markets. As such, deterrent penalties for sponsor failures are warranted;
- UBS and Cen cooperated with the SFC in accepting the disciplinary actions and the SFC’s findings and regulatory concerns; and
- UBS agreed to engage an independent reviewer to review its policies, procedures and practices in relation to the conduct of its sponsor business.
Mr Ashley Alder, the SFC’s Chief Executive Officer, said: “The outcome of these enforcement actions for sponsor failures – particularly failings when conducting IPO due diligence – 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.
The sanctions send a strong and clear message to the market that we will not hesitate to hold errant sponsors accountable for their misconduct.”
- UBS AG is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities.
- UBS Securities Hong Kong is licensed to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contract), Type 6 (advising on corporate finance) and Type 7 (providing automated trading services) regulated activities under the SFO. With effect from 7 June 2012, a part of the Type 6 regulated activity carried on by UBS AG, namely, acting as sponsor in respect of an application for the listing of securities, was assumed by UBS Securities Hong Kong.
- As the SFC’s disciplinary proceedings against other parties involved in the Other Listing Application are ongoing, the SFC will not disclose the detailed findings which led to its disciplinary action against UBS in relation to the Other Listing Application until the conclusion of its disciplinary proceedings against these other parties.
- Cen was approved to act as a sponsor principal and an executive officer of UBS AG during the period from 11 October 2007 to 29 May 2013 and from 4 October 2007 to 27 May 2015 respectively. Cen has also been licensed to carry on Type 6 (advising on corporate finance) regulated activity under the SFO as a representative of UBS Securities Hong Kong since 7 June 2012.
- China Forestry was listed on the Main Board of the SEHK on 3 December 2009. UBS and Standard Chartered Securities (Hong Kong) Limited were its Joint Global Coordinators, Joint Sponsors, Joint Bookrunners and Joint Lead Managers.
Trading in the shares of China Forestry was suspended since 26 January 2011. Subsequently, China Forestry was wound up and the listing of its shares was cancelled on 24 February 2017.
- According to the prospectus, for the year ended 31 December 2008 and the 6 months ended 30 June 2009, approximately 70.5% and 81.4% respectively of China Forestry’s customers by revenue were located in Yunnan.
- According to paragraph 1.3.3 of the Additional Fit and Proper Guidelines for Corporations and Authorized Financial Institutions applying for continuing to act as Sponsors and Compliance Advisers:
“As a general guidance, a Principal is expected to be in charge of the supervision of the Transaction Team(s).
The Principal should be involved in the making of the key decisions relating to the work carried out by the Transaction Team and must be aware of the key risks in such work and responsible for the measures to address them.
For example, in respect of conducting due diligence review on a listing applicant, the sponsor should ensure that the Principal is involved in determining the breadth and depth of the due diligence review, the amount of resources to be deployed for carrying out such work, making a critical assessment of the results of the due diligence and overall assessment of the adequacy of the due diligence review, and ensuring that steps have been taken to properly resolve all issues arising out of such review...”
- Tianhe was listed on the Main Board of SEHK on 20 June 2014, and was engaged in the manufacture and sale of chemical products. At Tianhe’s request, trading in the shares of the company was suspended on 26 March 2015. On 24 May 2017, the SFC issued a notice under section 8(1) of the Securities and Futures (Stock Market Listing) Rules directing the SEHK to suspend all dealings in the shares of Tianhe effective from 9 am on 25 May 2017. Trading in Tianhe’s shares remains suspended as of today.
- Code of Conduct for Persons Licensed by or Registered with the SFC.
- Paragraph 17.6 (f) of the Code of Conduct provides that, in conducting interviews, the sponsor should, among other things:
- carry out the interview directly with the person or entity selected for interview with minimal involvement of the listing applicant;
- confirm the bona fides of the interviewee (including establishing the identity of the interviewee and other relevant information) to satisfy itself that the interviewee has the appropriate authority and knowledge for the interview; and
- identify any irregularities noted during the interview (e.g.
interview not taking place at the registered or business address of the person or entity selected for interview, reluctance on the part of the interviewee to cooperate) and ensure any irregularities are adequately explained and resolved.
A copy of the Statement of Disciplinary Action is available on the SFC website
Page last updated : 28 Mar 2019