HONG KONG -- Leave it to this freewheeling center of Asian capitalism to find a new way to push the envelope in the ever-evolving relationship between investment banking and equity sales.

The first new twist -- one that could create a new type of conflict of interest -- involves the personal stakes that top executives of investment banks hold in newly public companies. Another is the relatively novel practice of taking fees in the form of shares from Internet start-ups, rather than in cash.

Currently, executives at

Goldman Sachs

and

Credit Lyonnais Securities Asia

have substantial personal stakes in companies that their firms have helped bring public.

A top-ranking executive at

Morgan Stanley Dean Witter

and an

ING Baring

analyst also have pre-IPO holdings in one of the companies, although their firms were not involved in the underwriting.

These positions create a potential conflict when equity analysts fail to shed light on a questionable stock in their research reports.

Consider the case of

Techpacific.com

, a start-up founded by former investment bankers that has been great for insiders but not for the hapless investors who bought in after the company came public. Techpacific's Web site describes the company as a one-stop shop for Asia's tech companies. "We do everything from evaluating your business plan to taking your company public and beyond," it boasts.

Since going public two weeks ago, Techpacific.com has lost about 50% of its value. It went public at HK$1.05 (13.5 cents) a share, only after shaving the offering price from HK$1.38 to get enough subscribers. It now trades around 62 Hong Kong cents, for a market capitalization of HK$1.4 billion, just under $200 million.

That's bad news for individuals who got in after the launch, but not for Hong Kong's cozy investment banking club, some members of which got pre-IPO shares at as little as HK19.6 cents, according to the company's prospectus.

Among the winners:

Henry Cornell,

a managing director at Goldman Sachs who until recently ran Goldman's private equity business in Asia. Cornell had a chummy relationship with the company; Goldman underwrote the offering.

Cornell paid $200,000 for 7.9 million shares. The value of the stake now: about $630,000.

In a highly unusual move, the investment giant did not issue a research report on the company. Underwriters almost always offer coverage of companies they help bring public, as well as make a market in those companies' shares.

Goldman Sachs declined to comment on the issue. Calls to the New York office, where Cornell now works, were not returned.

Another Techpac winner is

John Wadsworth

, chairman of Morgan Stanley Dean Witter in Asia. He paid $46,648 for 1.85 million shares. That works out to less than 20 Hong Kong cents a share, less than a fifth of the IPO price. So even though the shares tanked, he is sitting on big profits.

ING Barings

China analyst Graham Ormerod also got a cut-price chunk of Techpacific.

Neither firm was involved in the underwriting and neither has covered the company since it came public.

Perhaps the most glaring apparent conflict in town exists at

Credit Lyonnais Securities Asia

, where analyst Stephen Leung recently issued a report with a buy rating on Hong Kong-listed

New World Infrastructure

, a company which operates on mainland China. The report does not mention that CLSA was an underwriter of the company's offering. Leung also says he did not feel compelled to mention in the report that his boss, CLSA Global Emerging Markets' chairman Gary Coull, serves as a member of the company's board. Coull also has a pile of options on New World stock that will be in the money if the price were to rise from the current HK$8.30.

In November 1998, Coull got 120,000 options, exercisable from July 1999 to June 2004, with a strike price of HK$10.20. He has another 480,000 options with a strike price of HK$12, exercisable in three chunks, the first of which begins this July.

Coull and CLSA, which prides itself on the numerous awards won by its research department, declined to comment on the specific case of Coull's options.

The closest CLSA comes to disclosing Coull's role in New World and his options: a boilerplate statement saying individuals connected with the brokerage "may be materially interested in any of the stocks in any of the markets mentioned."

Spokeswoman Kylie Macintosh would add only that "CLSA always seeks to comply with all disclosure and other regulatory requirements in all markets in which Group companies operate. Any deviations from this policy are, upon coming to light, dealt with expeditiously."

The

Securities and Futures Commission

, Hong Kong's regulator, which is often seen as relatively weak compared with its American counterpart, the

Securities and Exchange Commission

, declined to comment on individual cases. A spokesperson pointed to the SFC's code of conduct for licensed investment advisers, which says that in the case of a conflict of interest, an adviser has to disclose the situation to the public. Still, situations such as those with Credit Lyonnais' disclaimer continue.

This sort of behavior does not cut it in the U.S., says Joe Price, head of the corporate finance department at the

National Association of Securities Dealers

.

"We require members to describe in an analyst report any proprietary holdings of the stock," he said. The sort of boilerplate disclaimers the Hong Kong firms get away with are not sufficient, he added.

There is yet another way that investment banks get more tied up in the fortunes of a stock after listing, one that the

NASD

would probably query if it happened in the U.S., according to Mark Matthews at NASD's London office: With cash so short these days in the Internet IPO field, some investment banks are taking their underwriting and management fees in the form of stock options.

Investment banks have always had an incentive to see shares they underwrite rise; it helps them attract new business. But when underwriting fees come in stock, this practice could be more of a concern: The investment bank not only has to talk up the stock before it goes to market, but it has an interest in seeing the stock price go up well after the issue is off its books.

This was the case with recently listed

iMerchants

in Hong Kong, where underwriter and manager

BNP Prime Peregrine Securities

agreed to take as much as 100% of its fees in the form of just under 3 million options.

The syndication desk at BNP declined to comment on whether it received cash on top of its options, which all were exercised in March.

If BNP sold its shares, which it got when it exercised options at HK$1.48, at the initial trading price of HK$1.90, the shares would have brought in HK$1.25 million, or $160,000.

iMerchants currently trades at about 60 Hong Kong cents.