The list just keeps growing.
On Thursday, China MediaExpress, a supplier of television advertising services on buses, became the latest Chinese company to be charged by the US Securities and Exchange Commission of “fraudulently misleading investors about its financial condition.”
The complaint also names the company’s chief executive officer, Zheng Cheng, and seeks to bar him from serving as an officer or director of any US publicly traded company.
From the SEC press release accompanying the complaint:
The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.
Some background for those not familiar with China MediaExpress. The Fuzhou-based company was part of a wave of Chinese companies that came to the US stock market through a so-called reverse merger, or backdoor listing. The process, in which a company acquires a shell company that is already listed, was a way for companies bypass the regulatory scrutiny involved in a traditional initial public offering. US-listed Chinese companies became the focus of shortsellers’ ire after some of the groups were accused of accounting fraud and exaggerating the quality and size of their assets — the most infamous of which was probably Sino-Forest.
In the case of China MediaExpress, the SEC said the company began materially overstating its cash balances in press releases and regulatory filings almost as soon as it became a publicly-listed company in 2009.
From the complaint:
Beginning in at least November 2009 and continuing thereafter, China Medialed by Cheng- materially overstated its cash balances in press releases and public filings with the Commission by a range of approximately 452% to over 40,000%.
For example, on March 31, 2010, China Media filed its 2009 Form 1 0-K and reported $57 million in cash on hand for the fiscal year ended December 31, 2009 when it actually had a cash balance ofonly $141,000. On November 9, 2010, the Company issued a press release announcing a cash balance of$170 million for the period ended September 30, 2010 when it actually had a cash balance of merely $10 million.
And there’s more:
In addition to massively overstating its cash balances, China Media also materially misrepresented (in public filings and press releases) the nature of its business relationships with two multi-national corporations, claiming they were its advertising clients when, in fact, they were not.
China Media’s falsely reported increases in its cash balances allowed the Company to attract investors and raise money from stock sales. Between January 2010 and December 2010, a hedge fund paid China Media $53 million to purchase millions of shares of China Media’s preferred and common stock.
As for Zheng Cheng, the SEC said he profited handsomely from the inflated revenue and profit figures through performance bonuses.
Cheng had personal financial incentives that were tied to China Media’s performance, as he had agreements to receive China Media stock if the Company met certain net income targets. For example, when China Media falsely met these net income targets for fiscal year 2009, Cheng personally received 600,000 China Media shares which, at the time of receipt, were worth approximately $6 million.
“We’re glad to see the SEC moving aggressively against another fraudster, and providing additional details that include Chairman Zheng’s attempt to bribe a forensic accountant with $1.5 million,” Carson Block, founder of Muddy Waters, told beyondbrics.
Muddy Waters, which led the attacks against against Sino-Forest, were among the shortsellers that accused China MediaExpress of inflating its revenue and profits figures. CME shares plunged 93 per cent in five months following Muddy Waters’s Feburary 2011 report.
Nasdaq ended up delisting China MediaExpress’s shares in May 2011 and the SEC deregistered the company’s securities last August.
Earlier in January, a Hong Kong court ruled that the company was a fraudulent enterprise and awarded Starr International – a fund run by former AIG chief executive Maurice “Hank” Greenberg and a China MediaExpress shareholder – as much as $77m in damages. It is not clear if the company is still in operation.
Here is a screenshot of China MediaExpress’s share price in its last days:
For Chinese companies that are still listed in the US, Thursday’s SEC charges are not going to do much to help burnish their images and reputations among investors.
The SEC has deregistered the securities of more than 50 companies and filed fraud cases against more than 65 issuers and executives as part of its investigation into US-listed firms from overseas. Others, facing waning investor interests, have been delisting with the help of private equity or mainland bank backing. Don’t be surprise if more companies head for this route.
Caterpillar setback puts Chinese reverse mergers back in the spotlight, beyondbrics
SEC targets Chinese pork processor, beyondbrics
US-listed China groups take private road, FT
Chinese companies caught in SEC crossfire, FT
Made in China, undone in America, FT
Investing: Problems flagged up, FT
Get alerts on Emerging markets when a new story is published