Watchdogs Growl over Concept-Stock Probes
(Beijing) – It appears to be dawning on officials at the U.S. Securities and Exchange Commission (SEC) that cooperative, cross-border financial investigations are completely foreign to China.
Washington's regulators have been trying since late 2010 to gather information that could help them probe fraud allegations involving so-called Chinese concept stocks listed on American exchanges.
U.S. investors were burned after buying concept stocks, which hundreds of Chinese companies have floated in recent years through reverse-mergers that legally sidestepped SEC disclosure rules.
Short-sellers, whistleblowers, skeptical shareholders and others have claimed, especially since last year, that concept-stock companies cheated investors by, for example, faking financial reports.
In many cases, SEC launched the investigations after share values plummeted. But investigators often hit impenetrable rock in China while digging for concept-stock company financial data because their Chinese counterparts refused to cooperate.
"The SEC is having a hard time using the tools that it typically uses to investigate or prosecute frauds," said William McGovern, a former SEC attorney now working in the Hong Kong office of New York-based law firm Kobre & Kim.
Under China Securities Regulatory Commission (CSRC) rules, domestic auditors and financial consultants are prohibited from sending audit reports on Chinese companies listed overseas to anyone outside China, said Guo Bingna, a lawyer at the Los Angeles-headquartered firm O'Melveny & Myers LLP.
Moreover, Guo said, the Chinese government has blocked access to audits under the nation's vaguely worded State Secrets Law.
Chinese companies listed on U.S. exchanges have been sued in U.S. courts by the SEC every year since 2004. Since 2011 alone, six concept-stock companies and their auditors have been sued.
Eric Jackson, founder of Hong Kong- and Shenzhen-based Ironfire Capital LLC, said most American investors these days assume any Chinese company that lists domestically through a reverse merger is a fraud. They're also skeptical about SEC's ability to prevent cheating.
A group called the International Organization of Securities Commissions (IOSCO), whose members include SEC and CSRC, coordinates cross-border securities regulation by arranging memorandums of understanding between participating countries.
So far, though, the IOSCO system has done little to help U.S. regulators garner CSRC support for investigations into Chinese firms. A source close to SEC said CSRC officials have claimed their mutual agreement does not obligate them to share audit reports.
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