TWO former senior employees of UOB Kay Hian Private Limited (UOBKH) were charged on Wednesday for allegedly lying to the Monetary Authority of Singapore (MAS) in relation to reports on a then Catalist aspirant. Lan Kang Ming, 38, and Wee Toon Lee, 34, each face three charges of providing MAS with false information in October 2018 in relation to due diligence reports on an unidentified company applying to list on the Catalist board of the Singapore Exchange. MAS said in a media statement on Wednesday that it was performing an onsite inspection of UOBKH between June and August 2018, to assess the latter's controls, policies and procedures in relation to its role as an issue manager for Initial Public Offering (IPOs). During the examination, Lan and Wee were said to have provided different versions of a due diligence report relating to background checks on a company applying to be listed on the Catalist board of the Singapore Exchange. UOBKH had acted as the issue manager
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Naomi Rovnick
15 March 2011
Chinese IPOs have long proven popular in New York, where investors desperate to diversify their holdings out of the moribund US economy queue up to grab a slice of the mainland’s rapid economic growth.
But some mainland firms listed in the US are being sent to the sin bin. The problem could be Chinese companies’ general reticence to explain themselves, which mixes about as well with New York investors’ high standards of corporate disclosure as a combination of chow mein and apple pie.
Or it could be far worse, with questionable mainland firms targeting America because they would not pass muster in Hong Kong.
American shareholders of Fujian-based advertising firm China MediaExpress Holdings are nervously awaiting news from the company after it halted trading in its shares late last Friday following a flurry of attacks from hedge fund short sellers and class action lawyers questioning the accuracy of its published accounts.
China MediaExpress is listed on America’s Nasdaq exchange and says it is the largest company displaying video adverts on DVDs inside mainland intercity and city to airport buses, for clients including Coca Cola.
On March 2 Muddy Waters, a small Hong Kong-based research house and investment fund with a good track record of making accurate calls about New York-listed Chinese companies, posted a paper online saying it had “amassed irrefutable evidence that CCME [China Media’s Nasdaq ticker] is a substantial fraud”.
The researcher and short seller claimed China MediaExpress only operated half the in-bus DVD machines it claimed to, alleging it had evidence from interviews with its staff and customers.
Save for a detailed statement on its website last month denying all allegations, China MediaExpress has not responded further. It has not responded to several interview requests from the South China Morning Post.
Last December, America’s Securities and Exchange Commission began an investigation into accounting practices at up to 350 Chinese companies that were listed on New York exchanges, The Wall Street Journal and multiple other US media reported. An SEC spokesperson did not return a call requesting comment.
A rag tag army of hedge fund short sellers and bloodthirsty class action lawyers have turned criticising New York-listed mainland firms into a new cottage industry.
Earlier, Chinese IPOs had proven remarkably popular with American investors keen to grab a slice of the nation’s rapid economic growth. According to Bloomberg, a total of 39 mainland companies conducted IPOs in New York last year, choosing the Big Apple over Hong Kong.
Some have performed relatively well. Ecommerce China Dangdang, an online bookseller, had a stunningly successful IPO last December, with its shares rising 87 per cent in a single day.
Dangdang released its first set of accounts as a public company last week. Its profits for the fourth quarter missed Wall Street estimates, falling 33 per cent on a year previously. But the firm’s shares are still trading at 43 per cent above their IPO price.
John Hempton, the chief investment officer of Sydney-based hedge fund Bronte Capital, said that while many US-listed Chinese firms were probably good companies: “For those that are bad, it’s easier to fool shareholders and analysts who are far away.”
Hempton says he has gambled almost 10 per cent of his small fund’s assets - he says he manages less than US$100 million - on bets that shares in New York-listed Chinese companies are set to fall.
And while the Bronte Capital manager oversees a comparatively small fund, he is a big name.
A former partner at Australian asset manager Platinum, Hempton struck out on his own in 2009. He has made a series of good calls on his blog, for example questioning in October 2009 whether Spanish banks were hiding their real estate losses. The Bank of Spain did not admit domestic lenders faced a funding crisis until June 2010.
It is often difficult for regulators outside the mainland, including Hong Kong, to investigate or punish corporate governance or accounting breaches unless they have the co-operation of the China Securities Regulatory Commission, which is never guaranteed.
“Other countries don’t have legal overreach into China, and that includes the US,” Hempton says.
A staffer at Hong Kong’s Securities and Futures Commission agrees with that. “If something goes wrong and the perpetrator is in mainland China, securing the co-operation to get them back here to be examined is not guaranteed” the SFC staffer said, on condition of anonymity due to the sensitivity of his role.
One company Hempton has singled out for attention is China MediaExpress. In November, he posted a note that queried the Fujian firm’s highly impressive profits. For the three months to June 30, the in-bus advertiser stated it had an operating margin of over 70 per cent.
“Frightfully profitable” was Hempton’s tongue-in-cheek verdict.
In its March 3 note, Muddy Waters alleged one of its analysts had conducted an undercover interview with a China MediaExpress sales rep, who said the company’s business was half the size stated in its published accounts. Muddy Waters, a micro-hedge fund house run by American Carson Block, a 34-year-old former lawyer, posted a transcript of the alleged interview on YouTube.
The SEC is examining mainland companies that joined US stock exchanges via so called “reverse mergers”, meaning they purchased the listed shell of an inactive company, leapfrogging most of the regulatory scrutiny a full initial public offering involves. China Media Express is one such reverse merger stock, having first sold shares in the US after it bought the listed shell of a moribund business named TM Entertainment and Media in June 2007.
In January, the SEC, where a spokesman did not return calls for comment, announced its first investigation of a Chinese firm under America’s Foreign Corrupt Practices Act. The company being investigated is Dalian-based Rino International, another reverse merger firm, that sells pollution control equipment to mainland steel mills and whose stock was traded on the Nasdaq.
Rino has been delisted. That was after the Dalian company stunned its shareholders on November 17 with the bleak admission that its accounts were unreliable.
“Our audit report(s) for the periods ended December 31, 2008, and December 31, 2009, and reviewed quarterly financial statements for periods between March 31, 2008, to September 30, 2010, should no longer be relied upon,” Rino said.
Muddy Waters was also one of the first research houses to publicly question Rino’s accounting practices and business model. A week before Rino admitted false accounting, Block published research online claiming Rino’s revenues were “much lower than it claims”.
On February 3, Muddy Waters published a note alleging China MediaExpress only operated half the in-bus DVDs it claimed to.
And on January 30, Citron Research, another small investment house, published a blog post alleging China MediaExpress had not been mentioned in a range of consultants’ studies on outdoor and in-bus advertising in China.
China MediaExpress did respond to this first set of allegations. On February 7, it issued a statement that it “categorically denies” Muddy Waters and Citron’s research, as well as Hempton’s blog.
“We have every reason to believe that each one of these ‘researchers’ is actually a short seller and each stands to make money at the expense of our stockholders” wrote the chief executive officer of China MediaExpress, Zheng Cheng.
The company has not responded to further allegations since. A spokeswoman for a public relations firm previously engaged by China Media Express said the company was no longer her client.
America’s aggressive crowd of class action lawyers - litigators who hope to win big by signing up aggrieved shareholders to participate in court cases against companies who have allegedly misled investors, and taking a large chunk of any compensation for themselves - have clearly got China MediaExpress in their sights.
Since February 4, 10 American securities law firms have filed suit against the in-bus advertiser. The company’s shares fell 29 per cent between February 1 and last Friday.
Another New York-listed mainland company under the SEC spotlight is China Green Agriculture, a firm based in Xiamen that sells fertilisers.
On January 5, J Capital, another little-known American investment fund, published research alleging that China Green’s sales were lower than reported.
On January 12, China Green told stockholders it was “co-operating with an informal SEC inquiry”.
The company has also stated that J Capital’s research was “largely inaccurate”. A spokesman for China Green said the company had no further comment.
Additional reporting by Sophie Yu