Investment Banks’Weapon of Children

“ Whom the daughter of Tianhe Chemicals board chairman worked for， who can get the business of IPO worth US$1 billion.”

This is a joke recently widely spread in the circle of investment banks in Hong Kong， but this unraveled the hidden rule about how investment banks contend for business in China.

The joke was sparked by the senior executives of Swiss Bank Corporation（SBC） who were suspended from their posts because of recruiting the children of leaders of the companies going to make the IPO. The case has triggered a shock in the investment banking circle of Hong Kong.

The contention for the children of leaders of the companies planning for listing has become an exposed secret among the investment banks. Nowadays， it is placed under heavier and heavier scrutiny. The case in SBC made many people think that the investment banks will be more cautious in the future， which will definitely benefit the Chinese investment banks even though they have lower risk control abilities.

The Similar Encounters of Two Investment Banks

Joseph Chee， president of the SBCs global capital market in Asia， was suspended from his post and placed under the investigation because of his recruiting Wei Jiao， the daughter of the board chairman of Tianhe Chemical. Prior to that， JP Morgan voluntarily quitted the IPO project of Tianhe Chemical， whose value reached US$1 billion.

Joseph Chee was likely to be the first senior banker in China to have his career affected by recruiting someone with “background”. From the end of last year， JP Morgan was frequently investigated by the U.S. regulatory departments because of the same thing. This also focused the spotlight on the international investment banks way of getting business in China by recruiting relatives of their clients.

A source close to SBC said that Tianhe Chemical was a private company and thus they did not expect that it could cause so much reaction. The source said that SBC had another investment director Sharlyn Wu investigated as well even though he was not as highly-ranked as Joseph Chee.

Tianhe Chemical， headquartered in Jinzhou， Liaoning， planned to go public in Hong Kong to raise US$1 billion. This is a big IPO project that is uncommon in these years. The company specializes in lubricant additives and special fluoride. It is a first-tier supplier for two Chinese state-owned enterprises， China Petrochemical Coporation and China National Petroleum Corporation. Its board chairman is Wei Qi， who was reported with problems last May. This January， the company made an official announcement， saying that the board chairman was maliciously slandered by others.endprint

The aforementioned source said that Wei Jiao was still working in SBC. According to the data from the Securities & Futures Commission of Hong Kong， Wei Jiao worked for JP Morgan from January 2012 to August 2013. From October 10， 2013， he began to work for SBC till now.

The source also said that the compliance department of SBC was investigating to see whether Joseph Chee followed the relevant procedures during the recruitment of Wei Jiao. A banker from an American investment bank that paid close attention to this case said that the involvers might show the proofs about how he got the project of Tianhe Chemicals IPO. If he won the project through recruiting Wei Jiao， it is going to be considered illegal. But since such a high-level executive was suspended for his post， the entire thing might be more than Wei Jiao and the case of Tianhe Chemical. Next the involvers， say， Joseph Chee and Sarlyn Wu， are going to resign from their positions.

Chee， a Malaysian Chinese with the height of 188 centimeters， is a star investment banker in Hong Kong. He had untold classical cases and colorful life experiences.

He was once one of the few Chinese senior executives in investment banks of Hong Kong. He once served in Solomon Brothers， a famous investment bank in Wall Street. Then he moved to SBC， devoted to the mergers and acquisitions before moving to the global capital market. He led all the deals of SBC in China from 2005 and created the entire business of SBC in Chinas capital market. Under his leadership， SBC has always been in the top of the list of investment banks in the IPO business in China. In 2010， Joseph Chee was appointed president of SBCs global capital market in Asia.

He is also known as a “super salesperson”. He will be found in any press conference or introduction and marketing event of new stocks arranged by SBC， during which he would spare no efforts talking about the merits of listed companies. As a man grown up in Malaysia， he could share 500 grams of spirit with the clients and play mahjong with them for a whole night.

JP Morgans “Children Project”

Drinking and playing mahjong with clients is quite common for ordinary investment bankers， but for those who gain the favor of clients by recruiting their children， these feats might not be necessary.

As reported by foreign media， JP Morgan established the “Children Project” in 2006， which had detailed records about 30 employees with important background and connections， as well as the deals achieved through their recruitment.endprint

Last May， the U.S. Securities and Exchanges Commission began to look into its Hong Kong branchs recruitment of children of some senior executives of Chinese state-owned enterprises， trying to decide whether these were a kind of bribery. The key to the investigation was to find proofs about whether these recruitments were done to get specific businesses. If so， JP Morgan is considered to break the Foreign Corrupt Practices Act.

The investigation touched Zhang Xixi， the daughter of Zhang Shuguang， former director of the Transportation Bureau of the Ministry of Railway. Now， Zhang Shuguang has been exposed as a corrupt leader and imprisoned. The Ministry of Railway was also disorganized. Zhang Xixi also left JP Morgan in August 2011， one year after her recruitment， as shown in the website of Hong Kong Monetary Authority.

As of last August， the U.S. government upgraded the investigation into illegal recruitment of JP Morgan in China and extended the scope to Asia. In addition， the U.S. Department of Justice was involved in the investigation， working together with the U.S. Securities and Exchanges Commission to look into this case.

JP Morgan announced that it would fully cooperate with the governments investigation. A source close to this investment bank said that JP Morgan was conducting an internal investigation in the companys recruitment of the daughter of Tianhe Chemicals board chairman.

And， as reported by for- eign media， the U.S. government is going to launch investigations into five investment banks having business in Wall Street. They are Citibank， Credit Issue Suisse， Deutsche Bank， Goldman Sachs and Morgan Stanley. The investigation into JP Morgan might provide a sample.

Where “rich children” go

The source close to JP Morgan said that the bank was not a negative example in the recruitment of clientschildren for other investment banks.“Everyone does it， actually，” he said.

Jamie Dimon， CEO of JP Morgan， had a broken relationship with the U.S. government. Thats why JP Morgan was chosen as the target of the investigation.

In truth， it has been 20 years since the international investment banks to recruit young employees with certain background， which refers to the posi- tions of parents or other relatives， family-run business and so on.

Wen Tianna， a senior financial and investment council， has been working in the investment banking industry since 1993. From then on he saw the birth of H-share， lPO of large state-owned enterprises and private companies in Hong Kong， which all contributed to the emergence of the hidden rule.endprint

“Usually， the employers started the interview with job applicants with the questions： ‘what do your parents do？and ‘What can they bring to us？，” he said.

Other investors said that both foreign and Chinese investment banks have recruited the children of governmental officials and famous entrepreneurs in China. Goldman Sachs， Morgan Stanley and Bank of America Merrill Lynch are used to doing this in a low-key manner， while Chinese investment banks keep a high profile in that matter and usually have more “children of important figures”recruited.

“The U.S. banks headquarters have strict rules fighting against this. If this way is blocked， the children of important figures are likely to be recruited by European investment banks and eventually they can go to local investment banks in China，”said Wen Tianna.

However， some investment bankers said that the golden age for investment banks have been gone. Many “children of important figures” have left this field and thrown themselves into PE funds or hedge funds.endprint