Wall Street Girds for China Bribery Probe as IPOs BeckonCathy Chan and Keri Geiger
Wall Street hiring in Asia is coming under increasing scrutiny in the wake of a U.S. criminal investigation into whether JPMorgan Chase & Co. employed children of China’s elite in violation of anti-bribery laws.
The Securities and Exchange Commission has asked several global investment banks for information about their hiring practices, according to four people familiar with the letters. The inquiry includes the leaders in international share sales by Chinese companies over the last five years: Goldman Sachs Group Inc. and Morgan Stanley, according to two of those people, who asked not to be identified because the review is confidential.
An examination of the banks’ hiring shows that Goldman Sachs and Morgan Stanley employ children of senior officials at four of China’s biggest state-owned enterprises. These companies and their units also have given the investment banks significant business.
Goldman Sachs, the leader in international equity offerings of Chinese companies in 2013, hired children of senior executives at China Petrochemical Corp., known as Sinopec Group, and New China Life Insurance Co. Morgan Stanley brought in an analyst whose father is both a top official of China National Pharmaceutical Group Corp., or Sinopharm, and the chairman of China National Building Material Co. The challenge for regulators is discerning whether relationships like these are coincidences or something improper, akin to a quid pro quo.
“Hiring the sons or daughters of influential families is not illegal in the U.S. or China,” said Michael F. Perlis, a lawyer at Locke Lord LLP in Los Angeles. “It is only illegal if it is done with the premise of obtaining business.”
Amid the inquiry, Wall Street firms continue to compete intensively for Chinese business. With their global distribution platforms, they are well positioned to handle the surge of overseas stock offerings that bankers estimate will come this year.
Though they declined to discuss specific hires, leaders of Morgan Stanley and Goldman Sachs said their firms have policies to ensure employment practices comply with the law. The hiring of family members of clients and influential people happens all the time in business, said Arthur Levitt, a former SEC chairman and an adviser to Goldman Sachs. It shouldn’t be construed as an act of influence peddling, he said.
An executive of China National Building Material addressed the issue for both his company and Sinopharm and said there was no connection between the hiring and banking business. A New China Life official said it followed strict procedures when selecting investment banks. Sinopec didn’t respond to requests for comment. Goldman Sachs and Morgan Stanley haven’t been accused of any wrongdoing.
A spokesman for the SEC declined to comment, as is its practice on ongoing enforcement matters. The informal inquiry is in early stages and could be closed without action, the people briefed on the matter said.
At issue in the inquiry is whether any firm hired relatives of influential Chinese officials to help obtain business or even as a reward, and whether that ran afoul of the Foreign Corrupt Practices Act of 1977, which makes it illegal to provide pay or benefits to a foreign official. The law also specifies what records must be kept to ensure compliance.
Business executives at state-owned companies in China qualify as government officials under the law, Perlis said. Attempting to win them over by hiring a family member or providing some other favor could be considered a bribe.
That determination, Perlis and other lawyers said, comes down to intent. Intent can be hard to determine. Children of influential leaders often possess credentials of their own, and many relationships between the Chinese companies and the bankers existed before family members were hired.
“Multinationals operating in China have to take a long-term view toward everything,” said Steven Weber, a professor focusing on international relations at the University of California, Berkeley, School of Information. “Both sides are investing in each other for the long term through an ongoing relationship, not just for single transactions.”
Chief executive officers of New York-based Morgan Stanley and Goldman Sachs have publicly discussed the focus on hiring and said that their firms have appropriate policies to protect against conflicts.
“Hiring somebody who is the child of somebody in government is not a bad thing,” Morgan Stanley’s James Gorman, 55, told CNBC in an interview last month. A lot of talented people come from those families, he said. “All you’ve got to do is have the appropriate conflict controls in an organization.”
Goldman Sachs’s Lloyd C. Blankfein, 59, addressed the matter on Bloomberg Television last week when he said both law and common sense dictate that benefits shouldn’t be granted to government officials for a business advantage.
“We have a lot of processes, and I think most institutions have a lot of processes and protocols and surveillance” to prevent misconduct, he said. Regulators will “investigate firms that haven’t come into contact yet with this issue to make sure that there is no issue.”
Spokesmen for Goldman Sachs and Morgan Stanley declined to provide further details about their policies.
Banks are vying for a flood of stock offerings that are planned in Hong Kong and New York this year. The increased scrutiny could put some Wall Street firms on the defensive. JPMorgan has dropped out of two share sales for Chinese companies since its investigation began, according to several people familiar with the actions.
About $25 billion may be raised this year through first-time sales of shares in Chinese companies in overseas markets, according to two bankers, who asked not to be named because the estimates are private. That would be an increase of more than 20 percent from the $20.6 billion raised last year, data compiled by Bloomberg show. New shares accounted for 58 percent of all Chinese equity sales abroad, including block trades and private placements, the 2013 data show.
“The deals will still get done, but will just cost the issuers and investors more money,” said Jacob Frenkel, a former federal prosecutor and former SEC enforcement lawyer now a lawyer at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “And the banks will consider a certain number of red flags a barrier to entry on certain deals due to the regulatory enforcement risk.”
The industry inquiry began last year after the SEC and then the Justice Department began looking into possible violations at New York-based JPMorgan, the largest U.S. bank. A spreadsheet emerged showing the firm tracked hires in Asia and any related business it won there, two people familiar with the matter said in August.
The investigation of JPMorgan was first reported by the New York Times. The bank has disclosed in regulatory filings that it’s cooperating with subpoenas and requests for documents about the employment of certain people in Hong Kong and the use of consultants in Asia. JPMorgan hasn’t been charged with any wrongdoing, and its spokesman declined to comment further.
The biggest U.S. and European investment banks have turned to a young generation of Chinese in recent years as the firms’ businesses in the region matured. More than a decade ago, the banks gained a foothold in the world’s fastest-growing economy by wooing power brokers known as rainmakers, now mostly in their 40s and 50s.
These Chinese bankers frequently had prestigious Western college degrees obtained after the Cultural Revolution, a decade or two of experience and a deep understanding of what Wall Street needed to succeed in China. Fang Fenglei at Goldman Sachs Gao Hua Securities Co., Wei Sun Christianson at Morgan Stanley, Charles Li at JPMorgan, Janice Hu at Credit Suisse Group AG and Lee Zhang of Deutsche Bank AG were among this prominent group based in Hong Kong and Beijing.
The rainmakers helped capitalize on a stream of deals as state-owned enterprises began pulling in billions of dollars in Hong Kong and New York for the first time.
Goldman Sachs last year raised 10 times more money for Chinese companies overseas than a decade earlier, according to data compiled by Bloomberg. Morgan Stanley’s business expanded fivefold in the same period. Since 1999, Morgan Stanley has worked on the most overseas Chinese equity offerings, netting the firm more than $1.66 billion in fees, based on average-fee data compiled by Bloomberg. Goldman Sachs collected $1.75 billion in fees, and UBS AG got $1.37 billion.
The ballooning business prompted big U.S. and multinational firms to fill out their operations with a younger cadre of China’s elite. Many of the newer hires are referred to as princelings because they descend from well-connected families if not Communist Party leaders.
“Global investment banks want princelings because this gives them access to the power elite inside China and, in their view, makes their prospects for money-making much better,” said Perry Link, professor of China studies at the University of California, Riverside.
Three attorneys close to the banks and two bankers who asked not to be identified because it could imperil their work said that the practice of hiring children of the elite has become more widespread in the past few years. Previously, princelings worked mainly on contract as advisers. The newest crop obtained a western education to pave the way to fulltime employment, and global banks have become more aggressive at pulling them in, the lawyers and bankers said.
Some of the employees have family ties to key government officials -- relations that often open doors at a variety of Chinese companies, the lawyers and bankers said. Other employees have connections to specific corporate clients.
Goldman Sachs has a longstanding relationship with Sinopec Group having handled a number of debt and equity offerings for the Chinese oil company and at least one acquisition.
In 2008, Goldman Sachs hired the son of a senior manager at the company. A graduate of George Washington University, Li Wei is the son of Li Chunguang, who has held various positions at the parent and its publicly traded refining unit, known as Sinopec Corp. The son, 28, is a Goldman Sachs associate in Beijing, according to a person familiar with his work.
Goldman Sachs has done at least eight capital markets deals with the publicly traded unit, half after the son joined the bank, data compiled by Bloomberg show. Sinopec Corp. selected Goldman Sachs as the sole investment bank on a $3.1 billion private share sale completed last year.
Large deals usually have more than one bank managing the sale. Over the past five years, about 20 percent of Chinese overseas listings greater than $1 billion were done with a single bank.
Multiple banks on public offerings “spread the risk and widen investor reach,” said Philippe Espinasse, a former head of equity capital markets for Asia at Nomura Holdings Inc. The Sinopec deal, in contrast, was a private placement of new shares sold to no more than 10 investors. Because it can take weeks to line up investors, this type of deal could benefit from the confidentiality afforded by a single bank, according to a person familiar with the deal.
Li Wei’s father, a member of Sinopec Group’s Communist Party committee, was appointed vice president of the oil giant’s publicly traded unit in 2003. Two years later, he became a vice president at the parent company. He returned to the listed entity, Sinopec Corp., as president in May 2013, after the private placement. His son declined to comment when reached by phone. Lv Dapeng, Sinopec’s spokesman in Beijing, didn’t return phone calls to his office.
Goldman Sachs also has extensive business ties to New China Life, working on several deals for the company and employing the son of its top executive. Goldman Sachs was one of three global coordinators on the Hong Kong portion of its $1.9 billion initial public offering in 2011.
A few months before the offering, Goldman Sachs hired Kang Kai, the son of the company’s chairman, Kang Dian, who has since added the title of CEO at the Bejing-based insurer.
Goldman Sachs has worked on two sales of the insurer’s stock and a bond deal since the IPO. In 2012, it was one of five underwriters on a $1.57 billion domestic bond sale.
Last year, $1.2 billion of New China Life shares were sold, Bloomberg data show. Goldman Sachs helped Zurich Insurance Group AG divest its remaining stake in New China Life in two parts. In the first share sale, Goldman Sachs was sole global coordinator, and in the second, larger tranche it jointly handled the deal with HSBC Holdings Plc and UBS. A spokesman for Zurich declined to provide further information.
It is customary for a state-owned Chinese company to be closely involved in the sale of its shares by a foreign investor, according to a senior investment banker in Asia.
New China Life strictly followed internal procedures during the IPO process, wrote Zhu Ying, the board secretary for the insurer, in a response to questions. It hired Standard Chartered Plc to provide guidance to the board on the share sale, including underwriters.
“The company hasn’t taken part in any decision-making process with regard to Zurich’s disposal of New China Life shares,” he said.
Kang Kai joined Goldman Sachs as an analyst in the investment-banking division in Hong Kong after graduating from the University of Birmingham in the U.K. He didn’t return calls to his office or requests for comments through the bank’s spokesman.
Neither Kang Kai nor Li Wei actively worked on any deal at Goldman Sachs related to their fathers’ companies, according to a person with direct knowledge of the matter.
Like Goldman Sachs, Morgan Stanley has business relationships with some of China’s largest state-owned enterprises. These companies have generated millions in fees for the firm.
Morgan Stanley has worked on several deals with Sinopharm. The chairman of that company, Song Zhiping, also heads China National Building Material, a gypsum and cement company.
Morgan Stanley hired Song Jingjing, the daughter of the building company’s chairman, in 2007. A year earlier, the firm was the lead manager on the company’s $267 million Hong Kong IPO. Morgan Stanley handled a secondary offering for the company in 2007, and subsequently shared the responsibilities on two more offerings with its Beijing-based partner, China International Capital Corp.
In 2009, the father was appointed chairman of his other company, Sinopharm. That same year, the IPO for its Sinopharm Group Co. unit, China’s largest drug distributor, was handled by Morgan Stanley, CICC and UBS. The mandate came before his promotion, according to Chang Zhangli, board secretary of the building company, and the father isn’t involved in the day-to-day running of the business.
In all, Sinopharm has done three equity deals totaling $2.26 billion with Morgan Stanley, CICC -- which Morgan Stanley owned 34 percent of until 2010 -- and UBS.
The three banks also have been selected for a proposed $1 billion IPO of a unit of Sinopharm known as China National Biotec Group, two people with knowledge of the matter said this month.
Since joining the firm in 2007, Song Jingjing has risen from analyst to vice president in Hong Kong. She attended the University of London’s School of Oriental and African Studies. Now 31, she declined to comment when reached by phone.
When asked about the deals and his daughter’s employment, Chang of the building company said the Morgan Stanley relationship began when she was still in school studying.
“Chairman Song has never recommended that managers of Sinopharm and China National Building Material use Morgan Stanley,” he said. “Chairman Song’s daughter is just an ordinary employee who wouldn’t be able to influence the choice of Morgan Stanley and therefore, there isn’t any conflict of interest.”
So far, Wall Street firms have seen relatively little impact on their business in China, with one person citing a silver lining of being able to pick up business from JPMorgan.
JPMorgan dropped out of China Everbright Bank Co.’s equity offering in November during the investigation of its hiring practices. The bank previously employed the son of the parent company’s chairman, according to a person familiar with his departure. The U.S. bank decided it would quit the Everbright deal, which at $3 billion was the largest first-time offering in Hong Kong last year, because the investigation delayed an internal approval process, according to two people with knowledge of the matter.
JPMorgan more recently bowed out of another IPO, for Tianhe Chemicals Group, because the bank previously employed the daughter of the company’s chairman, according to two people close to the deal. She left the bank in August of last year, one of the people said.
UBS, which is working on the IPO, subsequently hired her, according to two other people with knowledge of the matter. The Swiss bank has since put two Hong Kong bankers on leave while it conducts an internal review of whether hiring guidelines were followed, the people said. A spokesman for UBS in Hong Kong declined to comment.
The investigation of JPMorgan’s practices may end without action. The SEC drops probes even after years of investigation if it doesn’t find evidence of wrongdoing, as it did after an examination of Lehman Brothers Holding Inc.’s 2008 collapse, or if it doesn’t believe a case will prevail in court.
If a violation of the corrupt practices law were found, the bank or individuals could face charges or fines. JPMorgan could be spared criminal action by a non-prosecution agreement, specifying changes in internal bank policies. Both the SEC and the Justice Department also can pursue civil cases, which could lead to fines or an outside review of internal controls.
The broad inquiry by securities regulators across the industry is beginning with whether banks had proper compliance programs in Asia, according to the people familiar with the requests for information. It too could be closed without public action.
Levitt, 83, the former SEC chairman and a member of the board of Bloomberg LP, parent of Bloomberg News, captured a sentiment expressed by others within the banking industry who spoke on the condition they not be identified.
“Deals emerge from within the folds of a tight network of bankers, lawyers, corporate leaders and others in the know,” he wrote in a Dec. 25 opinion for the Wall Street Journal. “To close off access to such a network, in an exaggerated effort to avoid all appearances of impropriety and nepotism, is unwise.”
Some young Chinese bankers with influential family connections said they didn’t see a conflict in their jobs.
Kelyn Wu, the daughter of a senior Chinese Ministry of Finance official, joined Credit Suisse in Hong Kong in 2010. Her mother, Sun Xiaoxia, is the head of the finance department at the Ministry of Finance. Sun manages China’s state-owned financial assets and foreign debt, according to a 2012 statement posted on the ministry’s website. The Ministry of Finance didn’t respond to faxes seeking comment, and a Credit Suisse spokesman declined to comment about the relationship.
Wu joined Zurich-based Credit Suisse after a stint at HSBC and Capula Investment Management in Hong Kong. A graduate of the University of Exeter in the U.K., she works in corporate finance at Credit Suisse.
In an interview, Wu said she is too junior to influence how the bank wins mandates.
“I only focus on deal execution,” she said, and “have never been involved in any deals involving financial institutions.”