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SinoTech Energy lawsuit rings alarm

By Cong Mu (Global Times)

08:10, April 25, 2012

Another Chinese company, SinoTech Energy, was charged by the US Securities and Exchange Commission (SEC) yesterday for financial fraud, which a Shanghai-based lawyer said should serve as a warning to other Chinese companies seeking US listings.

The US regulator charged SinoTech Energy, a China-based oil field services company, and two senior officers "involved in a scheme to intentionally mislead investors about the value of its assets and its use of $120 million in IPO proceeds," the SEC said in a statement on its website yesterday.

The SEC claimed that the company's CEO Xin Guoqiang, 47, and former CFO Zhang Boxun, 35, were responsible for the alleged fraud.

The SEC has brought at least six cases against Chinese companies that listed in the US since last year, including Longtop Financial Technologies and Puda Coal, according to Reuters Monday.

Unlike many other Chinese firms that were listed through reverse mergers, SinoTech actually went public in an IPO on November 3, 2010, underwritten by UBS AG, Citigroup Global Markets Inc and Lazard Capital Markets.

"The companies whose sole purpose is to trick investors for money should not go to the US for IPOs. They may be able to fool the investors in China, but they can't in the US where the legal system is much more comprehensive," Song Yixin, a partner of the Shanghai Newhope Law Firm, told the Global Times yesterday.

The China Securities Regulatory Commission and the SEC has signed agreement to allow the US regulator to investigate the US-listed Chinese firms, and class action lawsuit is common in the US, which can easily make a company bankrupt, Song said.

"Companies with fraudulent intentions should refrain from humiliating themselves by going to the US," he warned.

The SEC also charged the company's chairman Liu Qingzeng, 50, for stealing $40 million from the company's bank account in the summer of 2011.

"Liu later admitted his theft to SinoTech's auditor and board of directors, but he retained his position and investors were not informed of the incident," the statement said.

The company's website could not be accessed by press time and its Beijing office phone number was not in service yesterday.

"SinoTech and other previously charged companies are just a few among Chinese firms, and they should not represent the whole business environment in China," Luo Yuding, deputy dean of the College of Business at Shanghai University of Finance and Economics, said yesterday.

However, corporate governance, which includes internal control and decision-making in uncertain conditions, is weak in many firms in China, and they need to improve their business ethics and disclosure mechanism, Luo said.

SinoTech's auditor resigned in September and withdrew its audit opinion. The auditor was not named in the suit, but SEC filings show it was Ernest & Young Hua Ming, Reuters reported.

Ernest & Young's Beijing office declined to comment when reached by phone yesterday.

US research firm Alfred Little published an online report in August alleging the company's fraud.

SinoTech attempted to rebut the report. Its CEO traveled to Lake Charles, Louisiana to solicit its sole supplier to perpetuate the company's fraud, but the supplier refused, the SEC said in a complaint to a US district court in Louisiana.

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