August 31, 2011

The SEC Uses Stop Orders Against Two Chinese Companies

Recently, I have blogged about the risks involved in some Chinese companies, more recently because the US exchanges have listed questionable companies even when the Chinese regulators would not. So it’s noteworthy that the SEC’s Division of Enforcement recently issued two stop orders to prevent effectiveness of the registration statements of two Chinese companies (whose auditors had resigned and trading had been halted several months earlier). Stop orders are fairly rare but certainly seem warranted in this case (here’s stop order for China Century Dragon Media and here’s stop order for China Intelligent Lighting and Electronics).

What might a Chinese company – one incorporated in the Cayman Islands – do when accused of fraud? How about move the assets to another company and leave 8000 employees stranded…

The Problems of Chinese Reverse Mergers

In this podcast, Matt Orsagh of the CFA Institute talks about reverse mergers for some Chinese companies that have implications for investors:

– What has the PCAOB said about Chinese reverse mergers?
– What do you think is the biggest risk for investors in these companies?
– How should investors go about analyzing these companies?

Enforcement Actions: Compare PCAOB vs. SEC

In a trio of recent enforcement actions, the PCAOB recently barred three certified public accountants for 2-3 years. It is a positive development to see the PCAOB take action against CPAs in such instances. In one of the actions, an audit partner was fined $50,000 for providing misleading documents to the PCAOB and not being truthful with respect to whether documents had been changed. The PCAOB can fine an individual up to $750,000 and a firm up to $15 million. In this case, the fine for misleading the PCAOB was 1/15th of the maximum. It will be interesting to see if the state boards of accountancy take action.

Lynn Turner notes “the enforcement actions do not name the company being audited. That is in contrast to SEC enforcement actions which do often name the company. I don’t believe there is anything in Sarbanes-Oxley that prevents the PCAOB from informing investors as to the name of the company. IT will be interesting to see if that is a trend.”

– Broc Romanek