By Rory Jones in Dubai and Margot Patrick in London 

HSBC Holdings PLC has come under investigation by regulators in Saudi Arabia for its role in a stock listing that has left investors nursing heavy losses and the bank's chief executive cleaning up a fresh mess.

Saudi Arabia's Capital Markets Authority, or CMA, in September suspended HSBC from conducting some asset-management activities and is investigating whether the bank's Saudi unit inflated the valuation of a construction firm's listing in 2008, according to three people familiar with the matter.

London-based HSBC's brush with the regulator in Saudi Arabia, one of the world's most promising new frontiers for foreign investors, marks another blow to a bank that has seen certain business practices run afoul of global authorities in recent years and its management criticized for a lack of oversight.

In June, HSBC reached a settlement with authorities in Switzerland in which its Swiss private bank was accused of aiding tax evasion by its customers. The bank paid 40 million Swiss francs ($42.3 million), acknowledging what it called "organizational deficiencies" and saying it has improved its processes.

The bank still is being investigated by authorities in several countries over the matter. HSBC Chief Executive Stuart Gulliver told British lawmakers in February that the Swiss issue was under control.

HSBC paid $611 million to global regulators last year over attempts to rig foreign-exchange rates. The bank said it wouldn't tolerate improper conduct by employees.

In 2012, the bank agreed to pay $1.9 billion in a settlement with U.S. authorities related to criminal charges that Latin American drug cartels laundered money through its U.S. bank. The bank entered into a five-year deferred-prosecution agreement and pledged to overhaul its compliance systems.

Mr. Gulliver met with CMA Chairman Mohammed Al Jadaan this spring as the bank grappled with the probe into the listing of Mohammed Al-Mojil Group, or MMG, according to a person familiar with the matter. In a separate investigation by the CMA, some high-ranking executives at MMG are charged with misleading investors and face five years in prison if found guilty.

HSBC confirmed to The Wall Street Journal that it is cooperating with both the CMA investigation into the MMG listing and a review of its operations that the regulator launched last year. Mr. Gulliver, who was head of the HSBC division overseeing listings globally from 2006 to 2011, declined to comment through a spokeswoman.

A lawyer for MMG founder Mohammed Al-Mojil said the CMA charging document "names various defendants but fails to show what actions they directly took that could be interpreted as a violation." The CMA didn't respond to emails and phone calls for comment.

The regulator is monitoring remedial action being taken by HSBC's Saudi unit to clear up compliance failings that go back more than 10 years, the people familiar with the bank's operations said.

The bank's Saudi unit has taken steps to restructure its board and governance committees, and has hired new management at the division, according to Majed Najm, chief executive of HSBC Saudi Arabia. "The result of the reforms is a stronger, better managed business," Mr. Najm said in a statement. Restrictions imposed by the CMA on HSBC conducting some asset-management activities were lifted last week, Mr. Najm said.

After the United Arab Emirates, Saudi Arabia is HSBC's second-biggest profit generator in the Middle East and North Africa. The region is the bank's second most profitable globally after Asia and last year made up 9.8% of a total $18.6 billion in profit, according to HSBC's annual report.

As part of the 2012 settlement with U.S. authorities, HSBC embarked on a court-supervised cleanup of its anti-money-laundering controls across 73 countries. To help counter the costs of additional compliance, HSBC is focusing its global operations on lucrative markets like Saudi Arabia, which last month opened its $590 billion stock market to foreign investors for the first time.

HSBC Saudi Arabia is 51%-owned by Saudi British Bank and 49% by HSBC. The U.K. lender has a 40% stake in Saudi British Bank, with the remainder owned by Saudi nationals.

HSBC's troubles in Saudi Arabia began last August when auditor PricewaterhouseCoopers produced a 200-page report on the bank for the CMA after complaints from customers about the performance of some investment products.

The report, reviewed by the Journal, outlined 185 recommendations on how to improve compliance, risk and governance. Nearly half the issues were identified as "critical" or "high risk." A companywide filter to fight financial crime wasn't being applied "in any way or form" as of June 2014, the report said, more than a year after Mr. Gulliver said the filter was crucial and that HSBC would pull out of countries where it couldn't uphold global standards.

An HSBC spokeswoman said in a statement: "HSBC has provided HSBC Saudi Arabia Limited, which is a joint venture between HSBC and Saudi British Bank, with HSBC Global Standards. As we do not have a controlling interest in HSBC Saudi Arabia Limited, we cannot compel them to implement."

The report also highlighted five cases of potential misconduct by HSBC's Saudi unit over a 10-year period, one of which was related to MMG. It noted a number of "optimistic" and "aggressive" forward-looking assumptions in the MMG valuation by HSBC that it said weren't in line with historical trends, such as the estimated value of future projects and potential win rate for projects on which the firm would bid. Three of the five cases examined real-estate investment products that had lost the majority of their value and in which clients alleged mis-selling of investment products. PricewaterhouseCoopers declined to comment.

In 2005, HSBC was hired by MMG as underwriter and lead financial adviser for the firm's initial public offering. The bank led due diligence and received a fee based on the value of the deal, according to the report. At the IPO in 2008, Mr. Mojil sold 30% of his stake to the public, reaping 2.1 billion Saudi riyals ($560 million).

The investment community hailed the listing as a success. Osama As'ad, the investment-banking director at HSBC Saudi Arabia who led the IPO, joined Mr. Mojil's investment company, Al-Mojil Investment, soon thereafter and is now chief executive. Ammar Qadumi, an auditor at Deloitte & Touche who worked on MMG's books during the listing process, joined the construction contractor in 2009 as deputy chairman for financial affairs.

In 2010, investors began questioning MMG's financial health as the firm began writing down the value of money it was owed for contracts while costs on projects ran over budget. MMG's shares were priced at 65 riyals ($17.33) at the listing, but they plummeted to 12.55 riyals by July 2012 when the Saudi regulator suspended trading.

In December 2014, Mr. Mojil, his son Adel Al-Mojil, Mr. Qadumi and nine other individuals were named in a formal charging document issued by the CMA to the Committee for the Resolution of Securities Disputes, a Saudi judicial body. Mr. Mojil, his son and Mr. Qadumi all face charges of misleading investors by allegedly inflating the value of fixed assets, recognizing unearned revenue and declaring inaccurate estimates for costs, some of which are tied to its IPO, according to the document reviewed by the Journal. Their assets are frozen and they are banned from travel, according to the document.

Mr. As'ad hasn't been accused of any wrongdoing.

Mr. Mojil and his son filed a claim last month in Dubai International Financial Centre courts against consulting firm Protiviti Inc.'s Middle East affiliate, the firm that produced a report for the CMA investigation into MMG in the aftermath of the suspension of share trading. They allege the CMA issued its charging document based on the Protiviti report, which they claim misrepresented facts and defamed them with unproven accusations.

"It is unfortunate that one could see such lack of clarity and total reliance by the CMA on a Protiviti report that we have proven, on numerous occasions, is materially erroneous," the lawyer for the Mojils said.

A lawyer for Mr. Qadumi, who left MMG in 2012, said his client hadn't violated any of the Saudi regulator's securities rules.

U.S.- based Protiviti said it was aware of the case against its Middle East affiliate but declined to comment.

The CMA also suspended Deloitte starting last month from offering audit services to any new listed companies because of the investigation at MMG. Deloitte previously confirmed the suspension but declined to comment further.

Meanwhile, authorities in the U.S. and U.K., including U.K. regulators the Prudential Regulation Authority and Financial Conduct Authority, have been notified of the investigation into HSBC's Saudi unit, people familiar with the matter said.

Ahmed Al Omran contributed to this article.

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