Citigroup Global Markets fined a record HK$57 million for failing in its duties as IPO sponsor to Real Gold Mining
Citigroup Global Markets Asia was fined a record HK$57 million (US$7.3 million) and reprimanded by Hong Kong securities regulators on Thursday for failing in its duty as a sponsor of the initial public offering of Real Gold Mining.
Citi had “failed to conduct adequate and reasonable due diligence on Real Gold’s customers” and did not “properly supervise its staff when carrying out the sponsor work on Real Gold’s listing application”, the Securities and Futures Commission said in a statement.
The SFC’s action represents the highest fine ever imposed by the regulator on an IPO sponsoring institution for failing in its duties. UBS said in its annual report in March that it had been fined HK$119 million and blocked from sponsoring IPOs for 18 months, and that the decision was not yet final as it would appeal.
Citi acted as the sole sponsor for Real Gold’s listing on the main board of the Hong Kong stock market in February 2009. Real Gold, which operated three gold mines in Inner Mongolia, priced its shares at the top end of indicated range, raising HK$1.03 billion.
The miner’s shares have been suspended from trading since May 2011 after it emerged the company had filed different accounts with Hong Kong and mainland authorities, and about HK$1.5 billion of funds had been funnelled to company founder Wu Ruilin without the knowledge of investors.
In June 2016 the SFC directed that the already-suspended company be blocked from future trading, in a bid to protect investors and market integrity. Real Gold has since become the longest suspended company on the Hong Kong stock exchange.
In reaching its decision, the SFC said it took into account that Citi has been fully cooperative regarding regulatory concerns, had taken action to strengthen its internal controls, and that this was the first and only listing application that drew concerns.
A Citi spokesman said the bank agreed with the SFC’s statement that it “found no evidence that [the breaches] were deliberate, intentional or reckless”.
He also said the resolution announced by the SFC on Thursday “does not involve any licence suspension and does not place any constraints on Citi’s business activities or on any individual in Hong Kong or elsewhere.”
“Citi has agreed to resolve this legacy issue with the SFC relating to its work as sponsor to Real Gold Mining`s listing application in 2009,” the Citi spokesman said. “Citi cooperated fully with the SFC’s investigation and has already taken appropriate action to ensure that it meets its legal and regulatory obligations at all times.”
The SFC said “Citi’s approach to due diligence reflected a reasoned weighting of production-related concerns over customer-related concerns, albeit one that the SFC does not consider to be compliant with the relevant regulatory requirements.”
The SFC has also brought claims against the Real Mining and its former controlling shareholder, and former director.
The SFC said Citi’s due diligence on Real Mining’s customers was “inadequate and substandard”.
For instance, investigation into the miner’s customers was done over the phone by Citi staff without adequate supervision, using telephone numbers provided to them without independently verifying the identities and contact details of the representatives.
In addition, Citi did not interview one of the three customers with whom Real Gold had allegedly entered into an important long term cooperation agreement for sales. Citi also did not confirm with customers about the transaction amounts with Real Gold.
The SFC said its view on Citi’s failure was supported by the opinion of an independent market expert.
Meanwhile, the listing prospectus disclosed that Real Gold’s sales increased by more than twenty-fold between the year ended December 31, 2007 and the 10 months ended 31 October 2008. The SFC found that information provided to Citi during its due diligence inquiries showed that apart from one customer, the customers of Real Gold for the two periods were completely different.
The previous record penalty imposed by the SFC was on IPO sponsor Mega Capital for its handling of the listing of Hontex in 2009.
Mega Capital was fined HK$42 million and had its license revoked over misleading information contained in the sport fabric maker’s listing prospectus.
Hontex was ordered to buy-back HK$1.03 billion worth of its shares from 7,700 small shareholders and was eventually delisted.
SFC executive director Thomas Atkinson said in October said it had been investigating 15 listing sponsors. While he did not name individual institutions, UBS and Standard Charted voluntarily disclosed that they face disciplinary action and are negotiating with the regulator.
Atkinson, who took office in May 2016, has put corporate fraud and sponsor regulation on the top of his agenda. The regulator is investigating 15 financial firms over concerns they may have failed in their duty when acting as IPO sponsors.
The article has been modified to add in Citi response.