A series of accounting scandals that began more than 2 years ago has taken a toll on US-listed Chinese stocks ever since then, causing many smaller, unknown firms to de-list and even close. The biggest name to fail was financial services firm Longtop Financial, which once had a market cap in the billions of dollars but now no longer exists. But most of the victims so far have been smaller, obscure firms that no one had ever heard of before. But that could soon change.
In the latest twist to this story, the US securities regulator has filed fraud charges against one of the now-defunct companies. Those charges against China MediaExpress are the latest in a series of growing signs that the US Securities and Exchange Commission could soon file similar charges against one or more of the big 4 global accounting firms that audited the financial records for many of these failed and troubled firms.
In its case, the SEC makes numerous fraud charges against both China MediaExpress and its CEO Zheng Cheng for misleading investors. (English article) In one particularly illustrative instance, the SEC charges that the company told investors in its 2009 annual report that it had $57 million in cash on hand, when in fact it really only had $141,000.
There’s no detail on Zheng’s whereabouts, but I suspect that he’s in China and there’s little or no possibility he will come to the US to serve any jail time if found guilty. Still, the fact that the SEC is pursuing this case is evidence that it intends to pay closer attention to Chinese firms that choose to list in New York.
China MediaExpress was one of many such Chinese firms that never officially held IPOs, but rather obtained their US listings through low-profile “backdoor offerings” where they simply purchased existing listed companies. MediaExpress made its backdoor listing in October 2009, and its stock was de-listed 2 years later at the start of the regulatory cleanup.
The company’s auditor was the China office of global accounting firm Deloitte Touche Tohmatsu, which resigned as MediaExpress’ auditor shortly before the company was de-listed. One of MediaExpress’ shareholders later sued both the company and Deloitte, and in January this year a Hong Kong arbitration panel ruled that MediaExpress was a fraudulent enterprise. (English article) The panel also awarded the plaintiff, Star International, $77 million in damages.
The SEC has aggressively pursued access to the records of many of the problematic Chinese companies as part of its investigations. But Deloitte and the other big accounting firms have refused to cooperate, citing territorial issues since most of the records are in China. Of course, speculation has been rampant that the big name auditors either knew or suspected that accounting fraud was taking place, and may have even assisted in helping to commit the fraud.
After continuously tussling with the accounting firms over the last 2 years, the SEC finally scored a major victory last month when it signed a landmark deal with the Chinese securities regulator on the matter. (previous post) That agreement should give the SEC access to the records it was seeking, including the records for Longtop Financial that was also being audited by Deloitte.
All this noise leads me to suspect that these latest charges against MediaExpress could be just the latest chapter in this saga, and we could see some much bigger noise later this year after the SEC finally gets to examine the auditors’ records. That could potentially result in new charges against one or more of these big global firms for either fraud or negligence.
Bottom line: The SEC’s fraud accusations against China MediaExpress could be followed by similar charges against one or more of their auditors by the end of this year.