Fool me once, shame on you; fool me twice, shame on me.
Another recently listed private mainland firm sponsored by investment bank UBS has been found to have used falsified financial figures in its prospectus.
First, China Forestry's board admitted that basically every document prepared for its listing was fabricated. Then, on Monday, provisional liquidators were appointed for China Metal Recycling after the Securities and Futures Commission alleged fraud in its listing prospectus.
Of the 12 newly listed companies suspended for financial irregularities, four had UBS as a sponsor.
One explanation of that high ratio could be the bank's dominance in the listing of private enterprises. The more firms one assists, the greater the chance of being fooled by some of them.
Fair enough? An examination of the bank's involvement in CMR's life cycle is telling.
Although CMR claimed a leading position in China's metal scrap business and 145 per cent compound annual sales growth, the firm had massive trade receivables and for years failed to generate enough cash for its operations.
To pay the bills, it took out a US$80 million loan, paying a lofty rate of 8.5 per cent, in October 2007. Coincidentally, UBS funded US$25 million of the loan. Two hedge funds provided the rest.
The creditors would be repaid on the day of CMR's listing, plus they got warrants for its shares.
To UBS, a lot depended on CMR's successful listing - the paying back of the loan, HK$25 million worth of shares and even its fee as a placing agent for the loan. That's HK$275 million, or more than 19 per cent of CMR's listing proceeds, on top of the IPO fee. The deadline was October 2009.
To be fair, CMR did say in the fine print of its prospectus that, under the listing rules, UBS was not considered to be independent as a sponsor of its IPO.
CMR was listed in June 2009, bringing UBS and the funds a handsome gain.
Five months later, problems surfaced. CMR's financial controller and director Wong Hok-leung resigned because "the board has failed to address his concerns or provide clarification on certain issues and that he has been denied proper access to the financial information".
The company denied his allegations and brought in a new manager. Guess who? Yes, a former UBS banker. Before joining CMR as its corporate finance president, Fung Ka-lun was a director at UBS. Fung subsequently became a CMR director.
Despite Wong's allegations, one bank maintained its buy recommendation on CMR. Guess which one? Yes, UBS.
In August 2010, while CMR was trading at HK$7, having missed its interim profit target by 10 per cent, a UBS analyst said the stock would reach HK$12.30.
In September last year, the same analyst raised the target to HK$15.60, saying the company was "ready for a cyclical and structural up-cycle". CMR was trading at HK$6, and other analysts downgraded it further.
On January 25 this year, the firm announced the sale of a 29 per cent stake to a state-owned enterprise.
"Some investors have concerns over CMR's corporate governance and business model, which we think has been an overhang to its share price," UBS said in a research report. "We think this deal signals endorsement."
Three days later, US fund Glaucus Research issued a strong sell report calling CMR's financial figures "a lie". The SOE delayed the stake purchase for six months. The rest is history.