Four brokerages receive penalties! Guotai and Haitong are warned for their involvement in Purui Pharmaceuticals' fraud.

On March 20, the Shanghai Securities Regulatory Bureau announced multiple administrative regulatory decisions. Among them, Guotai Haitong (601211) was issued a warning letter for multiple violations of professional conduct in the Promed Pharmaceutical sponsorship project.

Meanwhile, a regulatory storm affecting several brokerages is sweeping through the capital markets. In addition to Guotai Haitong, many brokerages including Huaxi Securities (002926), Zhongde Securities, and Lianchu Securities have been penalized by the Shanghai and Sichuan Securities Regulatory Bureaus. The reasons cited include issues with the quality of their investment banking practices: from due diligence oversights in bond underwriting, to careless checks in mergers and acquisitions, to lapses during ongoing supervision. Regulators are intensifying accountability for intermediary institutions as “gatekeepers.”

Promed Pharmaceutical Fraud and Intermediary Failures

The root of this turmoil points to Hainan Promed Pharmaceutical Co., Ltd., once a star on the Growth Enterprise Market, now delisted due to financial fraud.

According to the earlier issued Administrative Penalty Decision by the China Securities Regulatory Commission, Promed’s financial misconduct was shocking. During 2021-2022, the company significantly inflated revenue and profits by fictitious sales of finished drugs and raw materials. In 2021, it inflated operating income by 436 million yuan and total profits by 290 million yuan, accounting for 62.06% of the disclosed profits for that period. In 2022, it inflated operating income by 456 million yuan and total profits by 379 million yuan, representing 86.36% of the disclosed profits.

Additionally, Promed accounted for its trading of acetyl iodine, iodine compounds (used in iodinated contrast agents), and yeast extracts on a total amount basis, leading to overstatements of operating income by 78 million yuan in 2021 and 59.26 million yuan in 2022.

Guotai Haitong’s predecessor—Haitong Securities—was the sponsor for Promed’s 2020 private placement and 2021 convertible bond issuance to unspecified investors. During these projects, Haitong Securities was responsible for verifying the company’s financial authenticity. However, investigations by the Shanghai Securities Regulatory Bureau found that Guotai Haitong had four major issues during ongoing supervision: inadequate investigation of abnormal or concerning situations, unprofessional conduct by project staff, incomplete internal quality control, and inaccurate conclusions in supervision reports and special review opinions.

Due to negligence during ongoing supervision, Promed’s stock price plummeted, causing heavy investor losses. A first-instance lawsuit has already ruled in favor of investors’ claims, and legal accountability is underway. For Guotai Haitong, this penalty not only damages its reputation but also exposes risks in handling high-risk projects.

Internal Control Challenges

It is noteworthy that Promed’s case is not Guotai Haitong’s first penalty related to sponsorship business. As the brokerage industry consolidates, deeper internal control issues have surfaced under strict regulation.

Looking back to May 2025, shortly after its rebranding, Guotai Haitong Securities received a notice from the Shenzhen Stock Exchange pointing out its misconduct in the IPO of Zhongding Hengsheng Gas Equipment (Wuhu) Co., Ltd. The exchange identified five core violations: insufficient attention to major internal control flaws of the issuer, inadequate verification of financial information reliability, incomplete review of R&D expenses, insufficient verification of revenue recognition, and gaps in disclosure of fund flows and profit commitment agreements. Due to the severity, two sponsoring representatives were disciplined with a six-month ban from signing issuance and listing documents.

In December 2025, the Shenzhen Stock Exchange issued another regulatory letter to Guotai Haitong regarding the restructuring of Taiyuan Heavy Industry (300197). During review inquiries, Guotai Haitong claimed to have conducted strict verification of the target’s revenue recognition. However, it was later found that the target company had recognized revenue two years early, indicating clear deficiencies in the review process.

Within just one year, Guotai Haitong and its predecessor Haitong Securities faced consecutive issues—from IPO sponsorship to M&A financial advisory, ongoing supervision, and underwriting—highlighting internal compliance gaps amid rapid business growth. Although the March 2025 merger of Guotai Junan and Haitong Securities was seen as an opportunity to build a top-tier investment bank, the combined Guotai Haitong must confront and resolve the legacy risks left by Haitong Securities.

Five Brokerages Penalized Simultaneously

While Guotai Haitong received its warning, the Shanghai and Sichuan Securities Regulatory Bureaus also issued penalties to three other brokerages: Huaxi Securities, Zhongde Securities, and Lianchu Securities.

The violations span multiple aspects of investment banking: Huaxi Securities was penalized for inadequate due diligence on collateral information and misuse of funds in bond underwriting and trust management; Zhongde Securities was warned for insufficient due diligence on large receivables, prepayments, and key clients during the private placement and bond projects of Taiyuan Heavy Industry; Lianchu Securities was warned for inadequate supervision of funds raised by Yushou Leasing and failure to disclose interim reports in a timely manner.

These penalties, issued within a short period and for similar reasons, reflect a tightening regulatory stance on intermediaries. The focus has shifted from merely investigating issuer fraud to a more thorough supervision of the “gatekeepers’” duty of care. In May 2025, the CSRC emphasized in the “Strict Law Enforcement to Support High-Quality Development of Capital Markets” that intermediary institutions are vital to market governance, and preventing “gatekeeper” failures is a top priority.

The delisting of Promed Pharmaceutical and the penalties on Guotai Haitong serve as stark warnings to the entire industry: under the full registration system, sponsor institutions and financial advisors must go beyond procedural compliance and pursue substantive diligence. Ignoring abnormal data, tolerating internal control flaws, or simplifying verification procedures will ultimately turn “gatekeepers” into accomplices.

For Guotai Haitong, despite its expanded scale post-merger, the issues exposed in the Promed project show that growth alone does not automatically enhance risk management capabilities. Clearing legacy risks from Haitong Securities and ensuring rigorous verification in the surge of investment banking projects will be crucial challenges for this emerging industry giant.