SEC’s Cross-Border Working Group Continues To Target China-Based Issuers

Introduction

A pair of recent enforcement actions brought by the U.S. Securities and Exchange Commission (the "SEC") reflect the SEC's continued focus on China-based issuers listed in the U.S. In the most recent case filed against a China-based issuer, the SEC charged China Media Express ("China Media") and its Chairman and CEO on June 20, 2013 with fraudulently misrepresenting its financial condition to investors in SEC filings dating back to November 2009. The China Media action comes on the heels of the SEC's May 15, 2013 filing against RINO International Corporation ("RINO"), a China-based manufacturer and servicer of equipment for the Chinese steel industry, and its Chairman and CEO. Both companies initially listed on U.S. exchanges via reverse takeover transactions ("RTOs") - China Media in November 2009, and RINO in October 2007.

These actions demonstrate yet again that the SEC is committed to heavily scrutinizing and often charging China-based businesses, particularly those that listed in U.S. markets via RTOs. These two cases also highlight the SEC's focus on pursuing individually the senior executives at the companies who are allegedly behind the fraud. This ongoing trend continues to have implications not only for investors in RTO companies but for all investors in China-based, U.S.-listed issuers. This includes private equity investors that are considering take-private transactions involving such companies. Particular care should be exercised with respect to such transactions where there are plans for the target's founders or other executives to remain with the company following the transaction's closure.

Background

The China Media and RINO actions are just the latest from the SEC's Cross-Border Working Group (the "Working Group"). As we have reported previously, the Working Group targets companies with substantial foreign operations that are publicly traded in the U.S. Since its inception, the Working Group has been behind the SEC's filing of fraud cases against more than 65 foreign issuers or executives and deregistration of the securities of more than 50 companies.

The speed and lack of third-party oversight inherent in RTOs has attracted SEC scrutiny since such transactions first gained popularity among Chinese companies in 2007. In 2010 and 2011, a series of auditor resignations, civil lawsuits, and allegations by short sellers that RTO companies employed fraudulent accounting practices led to an increase in related SEC...