SEC: Many Foreign Companies In U.S. Are 'Vessels Of Fraud'

WASHINGTON (Sarah N. Lynch) - Federal securities regulators are probing Chinese and other foreign companies with questionable accounting practices that have used backdoor methods to access the U.S. capital markets, a top regulator said on Monday.

"In recent years we have seen a spike of private companies merging with public shell companies," said Luis Aguilar, a commissioner at the U.S. Securities and Exchange Commission.

"While it is Chinese companies that have grabbed recent headlines, the problems coming to the forefront were not necessarily limited to companies based in China," he said.

Aguilar added that while the majority of these may be legitimate businesses, "a growing number" of them are proving to have "significant" accounting issues or are "outright vessels of fraud."

Aguilar spoke before the Council of Institutional Investors on Monday about a growing trend that has caused alarm at the SEC and led to trading suspensions and other enforcement actions.

At issue are moves by private foreign companies to merge with U.S. shell public companies to raise capital. Many of these companies have been Chinese. In some cases they have used a procedure known as a reverse merger to bypass the due diligence of an initial public offering.

But many of these businesses often have problems with the quality of their accounting and the SEC has been on the prowl for deficiencies and for ensuring the accounting is in line with U.S. standards after some companies hired unknown auditing firms.

Last week, the SEC suspended the trading of China Changjiang Mining & New Energy Co Ltd -- a Nevada company with headquarters in China -- amid questions about the accuracy of its public filings and the resignation of its auditor.

In another case, the SEC launched a formal investigation against Chinese printing equipment maker Duoyuan Printing Inc on concerns it filed false documents, failed to maintain adequate financial records and deceived its external auditor, Deloitte Touche Tohmatsu.

Since January 2007, Aguilar said there have been 600 backdoor registrations of this nature by foreign companies, 150 of which are based in China.

He said there is concern that U.S. accounting firms are signing off on the companies' statements without performing their own independent work and are relying instead on auditing firms in China.

He noted the SEC has launched an internal task force to probe fraud by overseas companies listed on U.S. exchanges.

"Our staff is committed to doing everything we can," he said. "The SEC has already brought cases and will continue to do so."

(Reporting by Sarah N. Lynch; Additional reporting by Dena Aubin in New York; Editing by Maureen Bavdek)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[2eyesopen]

07:04 PM on 04/12/2011

Not really all that surprising, is it? Illegal corporate/state-sponsored Chinese activity in the U.S. has been well documented. Read Eftimiades' work from the mid-90s: members.authorsguild.net/neftimiades. The financial aspect of this is a natural extension. Whether it's access to U.S. capital markets or plain old espionage, we need to beef up the SEC and other law enforcement agencies to provide better oversight of Chinese companies doing business in the U.S.

[cassie reinara]

12:22 PM on 04/06/2011

You think Wall Street is not cognizant of this? They are neck deep in this! It's just another way of making money for them. Business as usual. Until there is true reform, this will continue and get progressively worse.

[halfpricefaustian]

11:21 AM on 04/06/2011

If foreign companies are doing this, it should not be seen so much as a flaw on their part as a flaw on our part. It says our regulations are too lax and need to be tightened up.

[somewhatodd]

09:04 AM on 04/06/2011

fraud? on wall street? no, i don't think so.

[StopMakingSense2]

03:23 PM on 04/05/2011

If true they can count on full support from the republicans and chamber of commerce. Their their kind of people. Just as long as they keep the campaign contribution spigot open that is... They may be hoes but they aren't cheap...

[Rita Foster]

03:13 PM on 04/05/2011

American businesses ie Wall Street, could care less who or where the money comes from! ITS GREEN AND THATS ALL THAT MATTERS! Anyone can come to this country and buy up whatever they want....but you try to do the same overseas and see what happens! In some countries you can't even buy a house.....BUT NOT HERE!!!! Greedy false capitalist in this country have ruined America.....NOW WHAT?!!

[fineartgalaxy]

02:38 PM on 04/05/2011

China is a communist country. What do we expect? Honest dealings, transparent protocols, fair labor practices, and on and on? Yeah, right.

[americanrevolution]

12:03 PM on 04/05/2011

Nobody here is drinking the "TEA" nor the "Kool-aid"....

[frank day]

10:35 AM on 04/05/2011

Chinese Communist Party firms not on the up and up?

Shocking. Of course, Moody says Bank of America is rated AAAAA+++++

[iam99]

10:05 AM on 04/05/2011

They are here for the unimpeded run at their own catch of plunder. They're savvy business people.

[garymc8]

09:53 AM on 04/05/2011

The reason many foreign companies in US are "Vessels of Fraud" is
"When in Rome, Do as the Romans."
They have learned from the best.
enron, tyco, health south at&t, ge, monsanto, koch bros indust., haliburton, exxon, goldman sachs, bofa,...............

[Astronomy Guy]

10:51 AM on 04/05/2011

I see I was beaten to the punch, good job. Let's add Worldcom to this list of thieves shall we. Just like magicians, use a little misdirection and voila.

[ConsensusReality]

08:34 AM on 04/05/2011

Our own lawmakers keep this fraud going full speed as they suck up corporate bucks like thirsty swine.

[maxhardon]

06:42 AM on 04/05/2011

Let's see - a bank like Goldman Sachs makes say 2 billion on a shady deal with a hedge fund, and the SEC comes in after demands a "settlement" of 500 million to avoid prosecution. Isn't that a little bit of a fraud in itself?

Sort of like when the police allow a dealer to traffic in heroin for a "cut" of the profits.

[hrpmap]

06:27 PM on 04/05/2011

Exactly!!

[profoundimagery]

05:21 AM on 04/05/2011

I Agree with the comments, SEC should be in jail, awaiting military trial for treason, subversion, kidnapping, grand larceny, Insider trading, counterfeiting and more. But since they are the head oligarchs sodomizing the Constitution, you will find Senior citizens, Teachers, Children, Firemen, and Unions the EX-middle class (new poor) in jail instead. The same (accept the children) were too, racist, apathetic, stereotyping, condescending, and lazy to 'listen' well enough to learn, in jail before before the boogie man.
The good news is, we're awakening (I Hopy). Wont know until it lasts longer than the return of the mass media gang rape of public attention (again), or loss of net neutrality (increases). Pray the Google brothers sense of philanthropy holds against Comcast, enough to unite (solidly) with the masses.
Yes they overplayed their hand. What petition for recall have you signed?

[XWyomingrepub]

10:58 AM on 04/06/2011

What petition for recall is out there?

[pjwrites]

04:38 AM on 04/05/2011

If it isn't fraudulent, it isn't successful. That's the real secret behind business.

[garymc8]

09:54 AM on 04/05/2011

That businessmen are liars and cheats is the real secret behind a successful businessman.