Cautious schadenfreude might be the best way to describe the general mood in Hong Kong investment banking. Bankers usually cannot help delighting in the misfortunes of rivals, but plenty sense that they could be next.
Euromoney studied the new environment of enforcement and correction in Singapore private banking in the November edition. Now attention has turned to Hong Kong. UBS disclosed in its third-quarter results that it is under investigation by the Securities and Futures Commission for its role as sponsor on Hong Kong IPOs; Standard Chartered subsequently announced the same (enabling sleuths with access to Dealogic to conclude that the 2009 IPO of China Forestry, the only deal in recent years to involve both banks before StanChart abandoned ECM, is among the offending transactions).
In November, JPMorgan agreed to pay $264 million to settle a US investigation into its so-called princelings scandal – the institutionalized practice of hiring Chinese staff for their family connections rather than their qualifications.
But there is very little gloating going on, as several other banks look apprehensively at the two investigations and wonder if they will be next in the firing line.
Tom Atkinson joined the SFC in March as executive director of enforcement, bringing a straight-talking reputation honed at the Ontario Securities Commission.
In November he spoke at the Pan Asian Regulatory Summit held by Thomson Reuters to an audience waiting for clues as to what might be next.
He talked about investigations of recent years, saying that “corporate fraud and malfeasance pose one of the greatest threats to the integrity of the Hong Kong markets.”
Then he added: “Of particular note are those [cases] involved in the misconduct of IPO sponsors. To put it very lightly, the conduct and professionalism of some sponsors leaves a lot to be desired. You can expect to see more of these cases, and hopefully we will hold senior management and firms accountable.”
Few people expect UBS’s licence to provide corporate finance advisory services in Hong Kong will be suspended, despite the bank itself saying that it could happen. That statement, included in its results presentation, is thought to be an addition by the legal team as it is a technical possibility, rather than a likely outcome.
For Standard Chartered, having abandoned equity capital markets, the running joke is that if its Hong Kong licence were suspended it wouldn’t know where to find it.
But still there is nervousness among the ECM community about what other transactions might have been mishandled, particularly since the SFC’s net clearly goes back as far as 2009. “We’re a bit worried,” confides one banker at a large multinational.
The SFC is trying to talk tough – in May it named JPMorgan on a list of sponsors on Hong Kong Stock Exchange deals whose applications were rejected by regulators – and Atkinson’s very presence is meant to send a message, though cynics note that no matter what he says, if he has no power to pursue wrongdoing across the border in China, then it’s not much power at all.
Not so different
The princelings fine is a similar story: with a lot of nervous bankers reviewing their hiring practices over the last 10 years.
What JPMorgan did does not look great; it even gave its approach a name, the Sons and Daughters Program, and wrote some unwise emails, such as the 2008 one from a Hong Kong executive stating explicitly what was usually unsaid: “How do you get the best quid pro quo from the relationship upon confirmation of the offer?” He was talking about a job being offered to a relative of an official with a Chinese state-owned enterprise.
But do JPMorgan’s hires of Gao Jue, son of a Chinese commerce minister, or Tang Xiaoning, whose father had been a bank regulator and who later ran Everbright Group, really look so different to widespread hiring practices of the time? Gao Jue went on to work for Goldman Sachs, after all.
John LeFevre, a former Citi executive, refers to the practice in his book ‘Straight to hell’. “When I worked for Citigroup in Hong Kong, we recruited many of our interns and analysts from the pool of resumés that were sent in to Citi Private Bank by their ultra-high net-worth clients looking for favours,” he wrote. “None of them would have made it beyond the first round of interviews in New York. But a few of them were kids of well-known billionaire families and the rest were just super rich – all of them.”
He added: “It wasn’t simply that there was this implicit understanding that the hiring of princelings is good for winning future business; there were times where we would explicitly draw from those resources. ‘Hey, you know we’re pitching X next week for a bond deal. Does your dad know the CEO? Maybe he can remind them that you’d be on the deal team if we’re mandated.’”
Euromoney understands that the probe into JPMorgan has, at the very least, also looked at HSBC, Goldman Sachs, Deutsche Bank, Citigroup and Morgan Stanley, though it is not clear at this stage how many of those will be pursued. There are at least two other banks associated with this practice that should be worried too.
It is a bit of a legal minefield, however. What, for example, to make of Credit Suisse’s hiring of Janice Hu around the same time? Her grandfather was once general secretary of China’s Communist Party. Yet at the same time she was a respected banker. Was she hired for the connections or the skills? How could anyone prove it either way?
Regardless, is fair to say that in 2008 JPMorgan’s reputation for hiring princelings was no worse than anyone else’s in its peer group.
There is surely more to come.