Caution needed when dealing with IPO agents

PUBLISHED : Tuesday, 03 May, 2011, 12:00am
UPDATED : Tuesday, 03 May, 2011, 12:00am


KPMG senior manager Leung Sze-chit was acquitted on two bribery charges last week, but the case still leaves a lot of unanswered questions for our regulatory friends to think about.

One important message in District Court Judge Stephen Geiser's verdict is that accounting firms and investment banks should be cautious when dealing with mainland agents who act as initial public offering matchmakers.

In his verdict, Geiser ruled that Leung be freed immediately because the prosecutor could not provide evidence beyond reasonable doubt that he had committed a crime. But the judge concluded that Leung and his assistant, Suki Lau Shuk-ting, did receive money from mainland agent Chan Chau-wan.

The lesson is that professional firms with good reputations such as KPMG should be cautious in dealing with these mainland agents.

During the high-profile case, all eyes were on Leung, who was on the KPMG audit team that was helping to prepare a listing prospectus for Hontex International Holdings, which raised HK$1 billion in a share sale in December 2009. The accounting statements in the prospectus were later found to be unreliable by the internal auditor committee at Hontex.

Leung was acquitted of the charges brought by the Independent Commission Against Corruption, which accused him of accepting HK$300,000 from Chan.

Chan was a consultant for Fujian-based fabric maker Hontex, whose shares have been suspended from trading over questions about the accuracy of its listing prospectus.

The judge also acquitted Leung of the charge of persuading Lau to pocket an additional HK$100,000.

Chan, who allegedly paid the bribe, could not be located afterwards. But, during the hearing, it was revealed that she played a role in the Hontex listing process from the beginning and pushed Lau and Leung into taking the money, which she called 'generous lai see'.

During the hearing, it emerged that Chan, the mainland agent or middleman, was active in introducing several clients to KPMG. So far, only Hontex has completed an initial public offering.

Six months before the share sale, she met Leung and Lau and informed them that she would give them 'award money' after Hontex was listed. In January last year, right after the listing, Leung asked his immediate supervisor, Money Chow, how to handle Chan's potential offer. Chow said Chan was not a client of KPMG or on staff at KPMG, so she told Leung he did not need to report on what Chan would give him.

Later in January, Chan tried to give a present to Chow. She refused but did not report the matter to KPMG.

Then in February, Chan tried to give HK$100,000 to Lau, who refused it. Chan then approached Leung and stuffed HK$400,000 into his backpack.

Leung later gave HK$100,000 to Lau, saying Chan had called the money 'generous lai see'. It was Lau who later reported the case to KPMG, which reported it to the Securities and Futures Commission, which later referred the incident to the ICAC.

Chan's actions exposed several KPMG employees to situations that could potentially involve corruption. But the firm does not seem to have sufficient training about how to deal with these agents. This is why the judge called for professional firms to take care of their good reputation.

The trouble is, there is no one to regulate these middlemen or agents because they are not employees of the accounting firms or investment banks and they do not need a licence from either Hong Kong or mainland securities regulators. In a sense, they are out of control, even though they are playing a role in the listing process.

Many investment banks and Big Four accounting firms use agents or middlemen, saying that China is so big they cannot send their staff out to search for listing hopefuls. The agents identify companies and receive a fee from the listing companies for their services.

This may be a grey area that Hong Kong accounting and securities regulators need to look at.