(Yicai Global) Nov. 28 -- Shares in China Securities and Dongxing Securities plunged today after China’s securities regulator said both brokerages will be penalized for their roles in sponsoring the initial public offerings of two companies that have since been found guilty of fraudulent information disclosure.

China Securities’ share price [SHA:601066] closed down 3.4 percent at CNY23.86 (USD3.32). Earlier in the day it sank 5.2 percent to CNY23.40. Dongxing Securities [SHA:601198] slumped 2.5 percent to end the day at CNY7.96. Earlier it tumbled 5.5 percent to CNY7.72.

China Securities and Dongxing Securities both said they were notified last night by the China Securities Regulatory Commission that there will be penalties for failing to perform adequate due diligence on information disclosure documents in the two cases. Both firms apologized to investors but the size of the fines were not mentioned.

The fraud is related to two companies, Amethystum Storage Technology and Essence Information Technology, who went public on the Shanghai Stock Exchange’s Nasdaq-style STAR market in February 2020 and June 2020 respectively and to which China Securities and Dongxing Securities acted as independent financial advisors.

Both Amethystum Storage and Essence Information have admitted to cooking the books for several years both before and after going public. Amethystum Storage said it inflated revenue by CNY766 million (USD106.3 million) and profit by CNY376 million and failed to disclose external guarantees as required. Essence Information said it exaggerated revenue by CNY565 million and profit by CNY296 million, and failed to truthfully disclose related transactions and shareholdings.

Amethystum Storage’s stock price [SHA:688086] has lost 84 percent of its value since listing. Today it tumbled 4.1 percent to finish the day at CNY3.46. While Essence Information [SHA:688555] has lost 69 percent of its value since the IPO. Today the stock dived 5.9 percent to end the day at CNY6.02.

China’s regulators have been making greater efforts to hold brokers to account in recent years and making the punishments more severe. Sponsors involved in a fraud case may be suspended from sponsoring any more listings for between one and three years and the person in charge at the underwriting department must be dismissed, according to the country’s securities regulations. And the financial advisor in charge of the underwriting could be banned from the securities market.

Once the case enters the civil claim stage, the brokers could become co-defendants, a securities lawyer told Yicai Global.

Should this be the case, the losses could be heavy. Beijing-based China Securities had 78 IPO projects under review as of Nov. 27 and Dongxing Securities 13, according to Wind Information statistics.

Investment banking fees made up 20 percent of China Securities’ revenue in the first nine months at CNY4.5 billion (USD530 million), while it made up 26.1 percent of smaller Dongxing Securities’ earnings in the first half and is the brokerage’s second-largest earner.

Editors: Tang Shihua, Kim Taylor