The Securities and Exchange Commission this week charged a U.S. listed Chi-nese company and six of its officers and directors with orchestrating a massive accounting fraud. AgFeed Industries Inc. is a pig farmer that was formerly listed on NASDAQ.
Dune Lawrence of Bloomberg wrote an expose on Agfeed last December. That earned her a personal attack by TheBlot, a publication allegedly backed by Benjamin Wey. Accounting watchdog Francine McKenna wrote a lengthy piece on the alleged Agfeed scam. All of this is very entertaining stuff.
What is significant about the Agfeed situation is that the charged individuals include audit committee chairman K. Ivan Gothner of Wilbraham, Massachu-setts. While this is not the first time that the SEC has charged an audit com-mittee chairman, it is a rare occurrence and I believe the first against the audit committee chairman of a U.S. listed Chinese company.
The SEC alleges particularly egregious behavior by audit committee chairman Gothner. It alleges he was aware of the fraud, kept it from auditors, and ap-proved false financial statements. Francine McKenna explains how another audit committee member ultimately served as the whistleblower to out the fraud.
In the Puda Coal case, a Delaware Chancery Court judge had some strong words for the directors who watched as the executives stole the assets out from under them:
If you’re going to have a company domiciled for purposes of its relations with investors in Delaware and the assets and operations of the company are sit-uated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.
The Agfeed case should be a wake-up call for audit committee chairmen of Chinese companies. I have served as an audit committee chairman of a NAS-DAQ listed Chinese company that later went private. It was a very interesting and rewarding role, but I learned that doing the job effectively required a lot of time and effort. Chinese companies and their auditors need experienced audit committee chairman willing and able to probe deeper and to hold both the com-pany and the auditor to higher standards. Audit committee chairman who are not up to that task should step down.
Update: SEC issued a cease and desist order against the American audit committee chairmen of China-based L&L Energy. The CEO faces a criminal indictment.