China-Biotics has been one of my poster children for accounting frauds in China. It blew up in 2011 after it was attacked by Citron. At the time, I observed that with 54% of its assets in cash, the proof would be in whether the auditors were able to confirm the cash balances.
A month later auditor BDO resigned after they discovered that the company had sent them to a fake bank website to confirm the cash balances. There have been a number of problems with bank confirmations for Chinese companies, but this was probably the most audacious.
The SEC suspended trading in the stock and in February 2012 an administrative trial judge revoked the company’s securities registration for failing to file annual reports. The SEC has revoked the registration of many Chinese companies when they “go dark”.
What is unusual about China-Biotics is that unlike most other deregistered Chinese companies it did not just disappear. An appeal was filed against the SEC action. The company found a new auditor, Weinberg and Co., a small CPA firm based in Boca Raton, Florida. Weinberg audits a number of Chinese reverse mergers. Its most recent PCAOB review found deficiencies in four of five audits reviewed that were so serious that the PCAOB concluded that Weinberg had not obtained sufficient competent evidential material to support the opinion on the issuer’s financial statements. That is about as bad as it gets in a PCAOB report. PCAOB disciplinary procedures are so slow it could be years before Weinberg faces accountablilty for those audits. In the meantime, investors in their clients are exposed.
China-Biotics has now asked the SEC Commissioners to reconsider the decision to revoke their registration. The company’s lawyer argues they are now up to date in their filings. Although the CFO has been replaced, the CEO is still there. If the SEC commissioners vote to let this one trade again, they will let anything trade.
The SEC did the right thing and affirmed the revocation of China-Biotics registration.