Hong Kong moves closer to bank liability for IPOs

Wed Apr 18, 2012 10:31pm EDT
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By Rachel Armstrong

(Reuters) - Hong Kong's financial market watchdog is launching a public consultation process in the next couple of weeks that seeks to toughen rules for banks sponsoring initial public offerings, including holding them liable for faulty deal documents.

Such a move would spark fierce opposition from foreign investment banks, who have long stood by the assertion that sophisticated fraud is nearly impossible to detect.

According to sources with direct knowledge of the matter, the Securities and Futures Commission (SFC) is set to issue a two-part consultation paper, with one section proposing to toughen the code of conduct for IPO sponsors and the second making them liable for the contents of listing prospectuses.

"The focus is likely to be on due-diligence practices and liability, in case sponsors do not execute their work up to a required standard," said Bonnie Chan, a partner at law firm Davis Polk & Wardwell and former head of Hong Kong Exchange's IPO transactions department, who has not seen the consultation paper.

The initiative follows a string of scandals at Chinese companies that went public, only to then face accusations -- and in some cases proof -- of fraud shortly after listing.

Investment banks that often serve as sponsors of the IPOs hoped the issue would fade or, at worst, involve a few tweaks to existing disclosure rules. Sponsors, usually banks or smaller corporate finance houses, prepare a company's listing documents and perform due-diligence to ensure they comply with Hong Kong's listing rules.

Liability could leave investment banks, and possibly some of their employees, open to massive legal cases and fines, force them to abandon sponsorship of IPOs and leave that to less-experienced local banks and firms.

That means banks and other sponsors are likely to lobby hard against prospectus liability, arguing there's only so much they can do to prevent a fraudulent company executive from misleading investors.   Continued...