(Bloomberg) -- The Hong Kong financial group behind an initial public offering that stunned Wall Street by soaring more than 32,000% following its debut has drawn regulatory scrutiny over deals it arranged in the Asian financial hub.

The previously unreported probe by Hong Kong’s securities watchdog into AMTD Group Co., which is run by former UBS Group AG banker Calvin Choi, predates the US listing of its unit AMTD Digital Inc. Despite reporting just $25 million of revenue in the year ending in April 2021, AMTD Digital’s market capitalization briefly surged above $400 billion in early August -- surpassing giants including Goldman Sachs Group Inc. and JPMorgan Chase & Co. The stock has since tumbled more than 90%.

Hong Kong’s Securities and Futures Commission searched AMTD Group’s office and Choi’s home in February 2021, according to people familiar with the matter, who asked not to be named discussing private information. Investigators were looking into its underwriting arrangements as recently as November, one of the people said. The full scope of the inquiry and its current status are unclear. Some SFC probes never result in charges and those that do can often take years to become public.

The regulator’s scrutiny adds to a string of controversies in recent years involving Choi, who is appealing a separate SFC decision to ban him from the securities industry for two years over what the regulator said were conflicts of interest from his time as a UBS dealmaker. A unit of China Minsheng Investment Group, which bought a major stake in AMTD Group in 2015, publicly accused Choi of financial fraud, even putting up posters with his face on the streets of Hong Kong, according to a 2020 Caixin report. It’s unclear whether CMIG took any further legal steps.

Choi, who didn’t respond to repeated phone calls and text messages, has appealed the SFC ruling and a tribunal will hear the case in December. In September 2020 he told newspaper Tai Kung Pao that the allegations from CMIG were untrue and he had never had any authority over CMIG funds.

An SFC spokesman declined to comment. An official at CMIG declined to comment. AMTD Digital didn’t immediately respond to requests for comment.

The financier’s firm is one of at least seven from Hong Kong or mainland China to see wild price swings after listing in the US this year. US Securities and Exchange Commission Chair Gary Gensler has repeatedly warned about the risks of investing in Chinese companies and last week said the regulator pays close attention to wild market moves, without specifically mentioning any firms.

The SFC probe has focused at least partly on small-cap IPOs that were underwritten by a unit of AMTD Group, the same one that arranged the US listing of AMTD Digital, people familiar with the matter said. Deals scrutinized by the SFC include IPOs of IntelliCentrics Global Holdings Ltd. and China Bright Culture Group, the people said.

Investment Avenues

The Hong Kong stock exchange in June 2021 sanctioned two executives at IntelliCentrics Global after the company used more than 90% of the proceeds from its 2019 IPO to buy offshore promissory notes via AMTD. The bourse noted that the company has said its purchase “was a temporary and interim measure” to manage IPO proceeds. Even so, the exchange found that the firm and two executive directors had breached its rules.

China Bright Culture Group, a television producer, invested $70.8 million -- or 60% of the amount raised selling shares in Hong Kong -- in a promissory note issued by L.R. Capital Property Investment Ltd., according to its 2021 annual report. The full amount was later redeemed.

L.R. Capital Property shares the same Cayman Islands address -- and company secretary -- as L.R. Capital Management Co., in which Choi’s father held a stake until December 2021, according to filings with corporate registries in the British territory and Hong Kong. The latter company, a former majority owner of AMTD Group, played a part in the decision by the SFC to ban Choi, according to a ruling by the Securities and Future Appeals Tribunal in Hong Kong.

According to people with knowledge of how AMTD arranged deals, the firm worked with select investors to cover shortfalls in demand for IPOs. After the IPO, the newly listed company would invest similar amounts into wealth products managed by firms linked to AMTD, the people said.

If shares of the newly listed company rose after the IPO, the investors would sell and share the profit with the listed company, the people said. The IPO issuer would then redeem its investments in AMTD-linked wealth products, the people said. The issuer also agreed to cover any potential losses suffered by the select investors in the IPO, the people added.

Documents seen by Bloomberg News show close ties between some of the investors. Three companies that invested in one recent IPO underwritten by AMTD, for example, shared the same company secretary and two of them are registered on the same Hong Kong address, the documents show.

“Any kind of manipulation that is obscuring the nature of the cash flow or the nature of the company is a form of market manipulation that regulators are, or should be, watching out for,” said Veronique Lafon-Vinais, associate professor of business education at Hong Kong University of Science and Technology, speaking in general.

Without prior consent from regulators, listing rules in Hong Kong prohibit underwriters from allocating IPO shares to “connected clients,” or nominee companies unless the name of the ultimate beneficiary is disclosed, according to the placing guidelines.

AMTD Group has helped arrange at least 62 IPOs in Hong Kong and the US, including those of Ebang International Holdings Inc. and Molecular Data Inc., which together raised close to $200 million in New York in 2020.

In an April 2021 report, short seller Hindenburg Research alleged that both firms had diverted a majority of the funds raised into bonds issued by companies linked to AMTD.

In a statement last year, Ebang said that as part of its treasury management it had invested proceeds in bonds in “arm’s length transactions facilitated by AMTD,” and has redeemed the investment in full. Molecular Data invested $58.4 million in wealth management products issued by L.R. Capital Property, according to a company filing. The firm served notice for full redemption of the note at the end of 2021.

Intellicentrics, China Bright Future, Ebang and Molecular Data didn’t respond to emails seeking comment.

Connected Companies

Hong Kong’s market has long been plagued by allegations of transactions between closely connected companies. In 2018, the SFC’s enforcement chief accused a “nefarious network” of listed companies, brokers, money lenders and advisers of enriching themselves off unsuspecting investors. The regulator has since clamped down on the small-cap market, known as GEM, to root out the extreme price swings caused by so-called “ramp-and-dump” schemes that inflated the value of thinly traded companies.

Similarly extreme gyrations are now confounding US investors. AMTD Digital shares surged at one point to as high as $2,555.30 from its $7.80 IPO price, before falling to $186.93 on Wednesday. Another affiliate, AMTD Idea Group, climbed as much as 536% in New York. A little know financial services company, Magic Empire Global Ltd. -- unaffiliated with AMTD -- jumped as much as 2,825% following its debut on Aug. 6 before tumbling again. Other Chinese or Hong Kong-based firms have also seen big swings after listing in New York.

AMTD Group was founded in 2003 by Commonwealth Bank of Australia and billionaire Li Ka-shing’s CK Hutchison Holdings Ltd. Morgan Stanley’s private equity unit is also an investor, though it has pared back in recent years.

Choi took the helm after leaving UBS in 2015 with the backing of China Minsheng, which then held an effective 25% stake in AMTD Group. Choi’s mandate was to diversify away from insurance brokering to investment banking, asset management and financial technology. The US-listed AMTD Idea calls itself Asia’s largest independent investment bank and has boasted of “unparalleled access” to capital from Hong Kong tycoons and a “SpiderNet” of business contacts.

Choi is now the sole owner of a vehicle that controls 32.5% of AMTD Group, according to a filing. L.R. Capital, which Choi was linked to in the SFC probe, was a majority owner but sold its shares in 2021. AMTD Group owns 50.6% of AMTD Idea, which on Aug. 16 said it would inject $500 million in assets into AMTD Digital to bring its ownership to 87.64%.

A Hong Kong native and Canadian citizen, Choi has been a fixture at annual financial technology events in Singapore in recent years. In 2019, he joined former Hong Kong Chief Executive Carrie Lam on a foreign trip to Thailand and Malaysia, but a bid last year to join the 1,500-person electorate that picks the city’s leader was rejected by a vetting committee.

In the ban on Choi issued in January, the SFC said he failed to disclose his connection to L.R. Capital, which was an integral part of deals he was working on at UBS in 2014 and 2015.

In a statement last year, the financier hit back at critics, without mentioning any specifics. “There are those who envy and [are] jealous, and those who are cold-eyed and mockers, and malicious, there are slanderers,” he said. “However, entrepreneurs must insist that development is the last word.”

Some of AMTD’s most high-profile backers are now distancing themselves from the firm. Li’s CK Group plans to sell its remaining stake in AMTD Group, it said earlier this month. CK Group said it held less than 4% of AMTD Group and isn’t invested directly in AMTD Digital.

Morgan Stanley’s private equity unit, which bought a stake in AMTD Group in 2014, later sold most of its holding. It has no involvement in daily operations and is looking to exit the remaining 1.7% it still holds, a person familiar with the matter said.

Media representatives at Morgan Stanley and CK Group declined to comment.

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Author: Cathy Chan and Kiuyan Wong