By Sumeet Chatterjee and Elzio Barreto
HONG KONG, Oct 13 (Reuters) - Hong Kong's securities regulator has dropped a lawsuit against Standard Chartered Plc and UBS Group AG over their roles in the 2009 IPO of timber company China Forestry Holdings Co Ltd, two people with knowledge of the matter said.
The Securities and Futures Commission (SFC) suit filed in January this year sought unspecified damages for "market misconduct" over the IPO of China Forestry filed in November 2009, according to the court documents at that time.
China Forestry raised $216 million in the offering, but its shares have been suspended since January 2011, after its auditor said it had found possible accounting irregularities.
The company is now in liquidation and has been delisted from the Hong Kong exchange.
The regulator's latest move comes despite the fact it is widening its probe into cases of alleged market manipulation and corporate fraud that risk tarnishing former British colony's reputation as a global financial centre.
The SFC is probing "substandard work" by 15 firms in their roles as sponsors for IPOs that have caused billions of dollars in investment losses, a senior regulatory official said on Wednesday.
"The SFC issued the protective writ on s213 action with a view to achieving maximum benefit for investors who have suffered harm from alleged misconduct," the SFC said in a statement on Friday in response to Reuters request for comment.
S213 refers to section 213 of the Securities and Futures Ordinance to combat market misconduct.
After considering its legal position, the SFC determined its action against "certain parties was probably time barred", the regulator said, without elaborating and naming any of the banks in its emailed statement.
Standard Chartered and UBS declined to comment. The sources declined to be named as they were not allowed to speak publicly about the subject. The Wall Street Journal first reported the development.
The SFC's charges in the lawsuit against the two banks also related to China Forestry's 2009 annual report, its 2009 annual results and the results for the first six months of 2010, as per the documents it had filed with Hong Kong'sHigh Court.
The regulator had also sued China Forestry itself, as well as the company's two co-founders and its auditor KPMG, the court documents showed. It was not immediately clear if the SFC would pursue its lawsuit against those entities.
Standard Chartered and UBS separately disclosed late last year that the SFC was probing their role as sponsors of unidentified IPOs and that the regulator's actions could result in financial consequences.
One of the people with knowledge of the matter said that despite withdrawal of the lawsuit, the SFC's own investigation into the 2009 IPO would continue, which could result in some action against the banks.
Standard Chartered no longer has an IPO sponsorship licence in Hong Kong, but UBS still does.
With Hong Kong the world's hottest market for IPOs, scrutiny of listings is key to retaining its attractiveness to investors. Under SFC rules, banks can face fines and sanctions if their clients' IPO documents mislead investors.