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Errors of Aggression Catch up with Underwriter

Ping An Securities Co. has been slapped with a fine by the securities regulator and will lose its stock underwriting license for three months because of its sloppy work in underwriting the initial public offering of a company that turned out to be a fraud.

This is not the first time the leading underwriter had to swallow a bitter pill for its overly aggressive approach to IPO underwriting in 2010 and 2011, when it beat all other brokerage firms in the country in underwriting revenue.

This time, its stock underwriting license will be revoked for three months, with the starting date to be announced, the China Securities Regulatory Commission (CSRC) said on May 10.

That makes Ping An Securities the first brokerage firm to have its underwriting privilege halted since the current system was established in 2004. Previously, only the practicing license of the responsible individuals would be canceled, and the underwriting institutions got away with a slap on the wrist.

During the suspension, CSRC said it would stop reviewing the IPO applications underwritten by Ping An Securities. “The applicant companies are free to choose whether to change an underwriter,” a CSRC spokesperson said.

As of May 10, twenty companies underwritten by Ping An Securities were in the pipeline for IPO approval procedures, including one whose application had been suspended by the regulator.

As part of the punishment, CSRC has ordered Ping An Securities to hand over revenue of 25.5 million yuan earned by underwriting the IPO of the fraudulent company, Wanfu Biotechnology (Hunan) Agricultural Development Co. Ltd., in 2011. It also fined the brokerage firm twice that amount.

Two individuals who played a crucial role in the underwriting, Wu Wenhao and He Tao, were each fined 300,000 yuan and both barred for life from securities underwriting. Several others who worked on the case were punished.

Ping An Securities will also set up a 300-million-yuan fund to handle investor compensation. Those who suffered a loss because they bought or sold Wanfu’s shares within specific periods are entitled to a refund that includes the difference between their transactions and the commission charges and taxes.

Yang Yuxiang, chairman of Ping An Securities, said investors should take the money because they “cannot possibly get a better deal going through the litigation channel.”

CSRC also advised investors to accept the payment rather than taking their case to a court.

Ping An Securities is the first underwriting company to voluntarily offer compensation to investors. “We proposed the deal to establish an investor compensation fund ... in hopes of being exempted from the suspension of underwriting privilege,” an insider at the brokerage firm said.

The move may have softened the CSRC’s stance on penalties because sources close to the matter said that the regulator had intended to impose a six-month ban.

“In all, Ping An Securities will lose between 400 and 500 million yuan, most of which will be spent on investor compensation,” an industry expert familiar with the matter said. “That is fair enough.”

Other Problems

The Wanfu episode is one example of Ping An Securities paying for its past mistakes. It was the leading underwriter for the IPO of Wanfu, which listed on the Shenzhen Stock Exchange in September 2011.

Wanfu performed badly after the IPO, and the CSRC started investigating one year later. In March, the company published a self-review report, saying it inflated its revenues and net profits by 740 million and 160 million yuan, respectively, from 2008 to 2011. That means its IPO was also a fake.

Ping An Securities had been caught up in a similar scandal before. In 2010, it underwrote the IPO of Hunan Shengjingshanhe Distillery Stock Co. Ltd., a liquor producer. All went well, until the CSRC was tipped off shortly before the stock issuance that the brewer may have faked its revenues.

An investigation found no such problems, but Shengjingshanhe’s listing plan failed nonetheless because the regulator said it did not meet the IPO requirements regarding information disclosure of clients and related parties.

As punishment, Ping An Securities received a warning from the regulator, and the two individuals who led the underwriting were banned from underwriting for life.

The securities firm is now caught in another scandal, this one involving Shenzhen Hirisun Technology Inc., a service company for electricity producers. Hirisun listed on the Shenzhen bourse in 2011, and Ping An Securities underwrote its IPO.

Facing the grilling of CSRC investigators, the company confessed in April to inflating profits for three years through accounting gimmicks. It is unclear yet how it might be punished.

In the eyes of some industry insiders, it is no coincidence that Ping An Securities has run into underwriting troubles time and again.

Ping An Securities was known as the most daring underwriter in the field, one analyst said. It was the underwriter for many relatively small companies that other investment banks were hesitant to take on. It came as no surprise that some of those companies had hidden problems, he said.

The underwriting process in Ping An Securities is an “assembly line” with up to 400 people working on it during peak times, which made the company faster and potentially less careful than other underwriters, analysts say.

In 2010, Ping An Securities surpassed previous leader China International Capital Corp. with sixty-one underwriting projects, twelve more than the second-place holder CITIC Securities, data from the Securities Association of China shows.

It made 2.4 billion yuan in revenue that year. In 2011, it remained atop the list with underwritings for thirty-four IPOs and seven refinancing projects.

Then came the tipping point. Ping An Insurance (Group) Co., the securities firm’s parent company, moved to rein in the underwriter. Frustrated, the then-president Xue Rongnian left for Chinalion, a smaller, less prestigious securities firm. In 2011, between August and September alone, at least nine executives at Ping An Securities made the same choice.

In 2012, Ping An Securities slipped to being China’s third-largest underwriter, and revenue from its investment banking business declined.

That did not bother Ping An Insurance’s chairman, Ma Mingzhe. “Profits from investment banking meant little to the Ping An group,” he said. “But if anything goes wrong, the damage to our brand will be huge.”

It seems, however, despite the course change, his worst fears have come true.