WALL STREET INVESTMENT banks have agreed to pay US$1.4 billion in fees to settle charges that they issued overly optimistic research reports to support their investment banking business, causing shareholders to lose millions. Yet amidst all the brouhaha there, we have heard nary a peep about similar misdeeds in Hong Kong. It could be that Hong Kong's investment bankers floated serenely above the fray, and never got their hands dirty. Maybe we did not see the sort of shenanigans here that were so common in the US - such as the analyst who, while pushing the IPO of an Internet stock to fund managers, was calling it 'a dog' in private e-mails to colleagues. That is hard to believe. A lot of money was thrown at initial public offerings during the go-go years in 1999 and 2000. Banks issued US$8.5 billion in IPOs in 1999 and US$16.4 billion in 2000. Is it conceivable none of those offerings was fraudulently pushed on unwary investors? What is most likely is that the conflict of interest that bedevilled Wall Street analysts has occurred in Hong Kong but, like the worst kind of sewage, has yet to float to the top. All the signs of potential problems are there. American banks theoretically have the same compliance procedures in Asia that they do in the US, at least for shares that are sold to US investors. That means these rules are certainly not going to be any stronger - and could be a good deal worse - than the disastrous policies that were in place on Wall Street. Industry executives say the Chinese walls separating analysts from bankers are weaker in Asia than they are in the US. The simple reason is distance. If the lawyer at an American bank in New York was unable to control his own analysts down the hall, how was he supposed to regulate his analysts in Hong Kong, 13,000 kilometres away? How many Hong Kong analysts working on a deal have not ended a lengthy phone call with a New York compliance official, shrugged their shoulders and did what the bankers next door asked them to? As for the local banks, that is a whole different potential landmine. A determined investment banker (and most are) could drive a truck through the holes in the rules now on the books. The Securities and Futures Commission's Code of Conduct sets out general parameters of behaviour but provides few guidelines to actual practice. For example, the Code of Conduct states: 'When providing advice to a client, a licensed or registered person should act diligently and carefully in providing the advice and ensure that its advice and recommendations are based on thorough analysis and take into account viable alternatives.' It does not specify who is providing the advice, when it should be provided - a day after the IPO or a day before? A week before? (A crucial issue for investors) or what is meant by 'diligently and carefully'. Another section discusses the important question of disclosure, which goes to the heart of conflict of interest. The code says: 'A licensed or registered person should try to avoid conflicts of interest, and when they cannot be avoided, should ensure that its clients are fairly treated.' I find it particularly amusing to read that if you have two clients on opposite sides of the fence you, do not have to get rid of one. That flies in the face of regulatory logic. To its credit, the SFC is examining whether to revise its rules. In the spring, it surveyed investors and it is questioning others in the industry about whether to tighten standards. This is not an issue that is going to go away. Although we are in a bear market now, the turnaround will come soon and deals will flow. This issue will become particularly important as Hong Kong issues more and more shares for mainland companies, which are not known for their accounting transparency. Meanwhile, I keep waiting for the other shoe to drop, to hear about the Asian analyst who pushed an IPO on clients despite his reservations because the money was too good to refuse. Jake van der Kamp returns on Friday Graphic: ipo06gbz Graphic: moncolgwk
