Longtop, the SEC, and regulatory holes | China Accounting Blog | Paul Gillis

Longtop, the SEC, and regulatory holes

I apologize in advance for the sarcasm of this report.  

Longtop Financial Technologies stood alone among the many frauds that have been outed in China in the past year. It had come to market as a regular IPO rather than through the dubious reverse merger route. It had bulge bracket investment banks, a white shoe law firm and Big Four firm Deloitte as advisors. It had a multibillion-dollar market cap. The fraud caught everyone by surprise. 

Investors have been screaming for justice. The SEC has been investigating and issued a Wells Notice to the company in August indicating it was planning to bring an enforcement action against the company. But the SEC investigation quickly ran aground. China does not allow American securities regulators to come to China citing national sovereignty. Deloitte refused to turn over its working papers citing Chinese rules that prohibit doing so. The PCAOB has also been unable to come to China to inspect Deloitte’s work. 

Now the SEC has finally acted. They have charged Longtop with failing to file current and accurate financial reports with the SEC. No, they have not charged the company or any executives with fraud. They charged the company with late filings. The company now faces the horror of administrative proceedings in front of an administrative law judge. The judge could really throw the book at Longtop, possibly suspending trading in Longtop shares on the pink sheets for twelve months or taking the draconian measure of actually revoking its registration. Revocation would be especially harsh for Longtop, since they would be unable to sell the public shell to another fraudster.  

This is not justice. Where are the indictments of those responsible for the fraud?  Where is the restitution for the investors? Where is the evidence that the role of the professionals in this fraud has been evaluated and properly dealt with? Forgive me, but I am unimpressed.

The SEC indicates that the investigation is ongoing. But this is likely all they can do. Chinese companies listed in the U.S. fall into a regulatory hole, largely out of reach of both Chinese and American regulators. The Longtop fraud shows us that investors can fall into that hole as well. 

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