Hong Kong: cash for IPO approvals case kicks off next week

Bribery trial puts an awkward spotlight on the “global home of the IPO” 

Hong Kong’s stock exchange has just turned 21 with much to celebrate. Profits are at a record high. Fundraising tops the charts globally. Geopolitics is creating a steady pipeline of mega China firms looking to depart the US for a “homecoming” listing. The bourse now refers to itself as the “global home of the IPO.’’

At a cocktail ceremony in June, top executives at Hong Kong Exchanges and Clearing (HKEX) joined the political and business elite to toast the bourse’s accomplishments. As they did, a former top executive readied his defence for an upcoming bribery trial.

Eugene Yeoh Kim-loong, 44, is the proverbial uninvited guest at HKEX’s party. The former co-head of the exchange’s IPO vetting team is accused of taking kickbacks to favour listing applicants. His trial begins at the District Court on Monday.

IPO approval process comes under scrutiny

The case promises to give a rare close-up of the IPO approval process. Yeoh is accused of taking HK$9.15m in bribes from an IPO consultant, Richard Lum Chor-wah, as well as one charge of misconduct in public office. 

The offences took place between June 2017 and April 2019, according to Hong Kong’s anti-graft agency, the Independent Commission Against Corruption (ICAC). Although the ICAC refers to various listed companies being involved, only one has been named to date: Shen You Holdings, a manufacturer of sewing thread which made its debut on the Growth Enterprise Market in December 2017. (In May this year the company announced a foray into horse breeding.)

As the joint head of the IPO Vetting Team—a unit of the Listing Department of HKEX—part  of Yeoh’s misconduct charge relates to an alleged failure to declare a conflict of interest in handling and processing various IPO applications in which Lum participated.

The prospect of criminal scrutiny of these processes will likely prove uncomfortable for the exchange. Its role of regulating listing-related matters, from weeding out unsuitable applicants to enforcing the market rules, is much less feted than its ability to generate profits. In particular, the separation of powers within the bourse itself has proven controversial.

Conflict management at HKEX fails to hit the spot with securities regulator

Each year, the Securities and Futures Commission (SFC) conducts a review of HKEX to make sure the exchange carries out a statutory duty to ensure an orderly, informed and fair market. In 2020, the focus was on HKEX’s management of potential conflicts of interest and interactions between the Listing Department and the HKEX business units. A pervasive theme was that HKEX’s ability to observe Chinese walls was well off the mark.

The securities regulator found that the Listing Department, which vets IPO applications, would be invited by the business unit—and in at least one instance by then chief executive Charles Li himself—to meet potential listing candidates. The business side was clearly pitching for business. In the words of the SFC, such invitations were “inadvisable.’’

There was no indication that there was anything untoward said at the meetings—but there were no minutes kept, either. Responding to the SFC’s comments, HKEX noted that the business side no longer sends such invitations.

Pressure was also exerted on the Listing Department to speed up applications of desirable IPO candidates by copying the chief executive on emails, the SFC found. It also emerged that HKEX business staff gave 360-degree feedback of their counterparts in the Listing Department as part of employee evaluations.

The great wall of HKEX warrants a slide in a powerpoint

And while there were rules on the Chinese wall, HKEX did not have much in the way of actual guidelines: the only document the SFC found was a sole slide in a 2018 training manual for new joiners.

The business unit would also meet monthly with the Listing Division to discuss developments in the capital markets, including the IPO pipeline. Again, there are no minutes or other records of these discussions.

As for the role of the Listing Department in approving applications, the review noted its “significant discretion” in deciding which ones it would pass to the Listing Committee for scrutiny. The impression was of a department with a relatively free hand in making or breaking aspiring IPOs.

HKEX has since responded to the SFC’s observations: it has been actively considering and reviewing controls relating to the organisation of the Listing Department to enhance oversight, including the Chinese wall. In fact, it revised said wall in 2019 with a new protocol. The SFC however dubbed it ambiguous: broadly drafted, difficult to interpret and follow. It urged HKEX to devise new rules, practices, policies and guidelines.

Meanwhile, HKEX cleans house…

There have however been notable staff changes afoot at HKEX since the SFC report and Yeoh’s arrest in June 2019. Former chief executive Charles Li ended his contract early, being replaced by JP Morgan alumni Nicolas Arguzin in May this year. There are also new faces at the head of the IPO vetting team—both coming from a legal background. Yeoh, in contrast, came to HKEX in 2013 having previously worked as a Deutsche Bank small caps analyst.

In July 2020 HKEX announced the appointment of lawyer Janice Wu as a new co-head of IPO vetting, joining Stephanie Lau, also a qualified lawyer, who had been promoted to jointly head up the team in April 2020. Lin Shi had resigned as co-head in May 2020.

Senior compliance hires meanwhile have included Adam Singer who joined HKEX in June this year as Group Chief Compliance Officer. 

We will have to wait until later in the year to find out whether the hires will lead to a more positive report by the SFC in how HKEX segregates its business and IPO approval segments. In the meantime, all eyes will be on the District Court this Monday 9 August.