(Bloomberg) -- Hong Kong’s securities regulator is investigating allegations that CLSA Ltd. misled investors in its role as bond underwriter for a Chinese energy conglomerate that ended up in bankruptcy, according to people familiar with the matter.
The Securities and Futures Commission’s enforcement division recently began looking into the case after complaints from bondholders, the people said, asking not to be identified discussing private information.
It’s unclear whether the SFC has any evidence of wrongdoing by CLSA, which is based in Hong Kong and controlled by state-owned Chinese brokerage Citic Securities Co.
The allegations stem from a 2016 dollar bond sale CLSA underwrote for CEFC China Energy Co., an acquisitive oil giant that collapsed in 2018. Several buyers of the bonds, including a former CLSA managing director who purchased them for her personal account, have alleged that the brokerage and its parent company misled investors, failed to disclose conflicts of interest and struck a side deal with CEFC Energy that disadvantaged creditors.
SFC inquiries to CLSA have so far covered topics including the firm’s know-your-customer obligations for CEFC Energy and its communications to investors about market demand for the bond around the time it was sold, one person familiar with the matter said.
“It is our policy not to comment in respect of any question as to whether or not there is an ongoing investigation by the SFC,” a CLSA spokesperson said in response to questions from Bloomberg, citing confidentiality rules. The SFC declined to comment.
Kathy Liu, the former CLSA executive who has accused the firm of “blatant” misbehavior on the CEFC Energy deal, alleged in a Jan. 13 letter to the SFC that CLSA misled bond buyers by failing to disclose that there was only enough investor demand to cover 60% of the $250 million issuance. She said CLSA used its own capital to purchase the remainder.
The allegations from Liu and other bondholders, details of which were previously reported by Bloomberg and Debtwire, have drawn interest in Hong Kong financial circles in part because they’re viewed as a test of local regulators’ willingness to investigate a business owned by a powerful state-run Chinese conglomerate. Investors are watching cases like this closely as they try to gauge how the financial hub’s regulatory systems will evolve amid increased intervention in Hong Kong affairs by China’s central government in Beijing.
“CEFC Energy bondholders have taken significant financial losses, and the role this government-controlled brokerage played and its actions are important to investigate,” said Mark Williams, a professor at Boston University and former Federal Reserve bank examiner whose focus areas include corporate governance and business ethics.
For CLSA, the regulatory scrutiny adds to a turbulent period since the firm was acquired by Citic Securities in 2013. Internal disagreements about CLSA’s direction under Chinese government ownership have roiled the firm in recent years, leading to the departure of dozens of senior executives.
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