Chinese Firms Sound Off on CSRC Crackdown

, The Asian Lawyer

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Xiao Gang
CSRC chairman Xiao Gang

Chinese law firms are vowing to take a close look at their past conduct and procedures after the country’s securities regulator hit some of them with tough penalties for performing inadequate due diligence on initial public offerings. But many lawyers privately question just how much more they can do in China’s uncertain legal and regulatory landscape.

Last month, the China Securities Regulatory Commission ordered Beijing firms Dacheng Law Offices and JunZeJun Law Offices to pay $246,000 and $295,000, respectively, for their roles in proposed Shenzhen Stock Exchange IPOs determined to be based on fraudulent financial disclosures. The CSRC said it had suspended review of all listings applications submitted by Jingtian & Gongcheng pending an investigation of its work on the canceled IPO of a solar panel maker suspected of similar misconduct.

Zhang Hongjiu, a partner at Beijing-based Jingtian & Gongcheng, said the firm regrets mistakes it made and will make sure they don’t happen again. “We didn't do a good job in terms of risk control and we are currently reviewing it internally,” he said. “We hope the CSRC will issue their decision of punishment soon.”

The firms have been swept up in what appears to be a major crackdown on IPO abuses by CSRC chairman Xiao Gang, who took office in March. New IPOs in the major exchanges of Shanghai and Shenzhen have already been frozen for over a year, and banks and accounting firms have been punished along with law firms. In August, Chinese investment bank Everbright Securities Co. Ltd. was fined $71.3 million, while Ping An Securities had its underwriting license suspended and was fined $8.4 million a month later.

Other law firms that so far have not been targeted by the CSRC nonetheless said the regulator’s recent actions have been a wakeup call.

“This is a lesson for all of us to learn,” said David Tang, a senior partner at Shanghai’s Allbright Law Offices. “We have to be more prudent handling businesses. Partners should be more thorough and cautious when they take in cases.”

Liu Hongchuan, a partner at Beijing’s Broad & Bright, said the problem is that Chinese law firms usually have only weak oversight of partners’ activities.

“Some partners, motivated by money, will give legally questionable opinions just to satisfy the client,” he said. “They’re willing to take a risk because they will get paid if the deal works out, but the whole firm will take responsibility if things go badly.”

Both Tang and Liu said their firms are reviewing their internal processes.

But a capital markets partner at another Beijing firm disagreed that greed is a major factor in faulty legal opinions, noting that domestic Chinese IPOs are usually handled by firms for flat fees he considers low, ranging from $164,000 to $328,000.

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