What’s a good reason for an investment bank to shirk its responsibility? Earthquake
- Industry experts say the penalties are not tough enough to prevent misconduct
An earthquake was one of the reasons given by an investment bank for its failure to conduct due diligence.
Industry experts say a lack of harsh penalty is why some investment banks do not perform their gatekeepers’ role in full.
But the Securities and Futures Commission is taking its role as watchdog seriously, stepping up its vigilance. This month it slapped a record fine of HK$786.7 million (US$100.2 million) on investment banks UBS, Morgan Stanley, Merrill Lynch Far East and Standard Chartered for failing in their respective duties as IPO sponsors of China Forestry Holdings, Tianhe Chemicals Group and China Metal Recycling.
“Part of the answer is simply the lack of stiff criminal penalties,” said Steve Vickers, chief executive of risk consultancy firm Steve Vickers and Associates, who assists investment banks in their IPO due diligence. “As long as people don’t get sent to jail for deliberate misrepresentation and false statements then the deterrent value is limited.”
Vickers, a former head of criminal intelligence bureau at Royal Hong Kong Police, said after the financial crisis of 2009 many investment banks started cutting costs and began sending junior staff to get the job done, which led to a predictable deterioration in the quality of listings.
A magnitude 5.7 earthquake in Yunnan in 2009, is what UBS said prevented it from conducting an on-site examination to verify the existence of China Forestry Holdings’ forest assets.