If you’ve ever bought a Gucci or Louis Vuitton bag, or Armani suit that was “Made in Itily” as I have, it shouldn’t come as a great surprise each time that the Securities and Exchange Commission files suit against a Chinese company that made the mistake of listing itself on a U.S. exchange. I know how to spell Italy, the products in question were just reasonably well made, and cheap as chips.
China MediaExpress Holdings Inc (OTCBB:CCME), an (alleged) supplier of television advertising services on buses, was accused by the U.S. Securities and Exchange Commission of falsifying its financial statements today. The Fuzhou based company is accused of a number of discrepancies in its filings with the SEC. No, they’re not discrepancies, this is outright fraud despite the SEC’s use of rosier language. Additionally, MediaExpress filed statements that suggested ongoing negotiations with both PepsiCo, Inc. (NYSE:PEP) and Apple Inc. (NASDAQ:AAPL), which both companies deny.
The China MediaExpress Holdings Inc (OTCBB:CCME) case is the latest in a long-running crackdown by the SEC into accounting fraud at China-based companies listed on U.S. stock exchanges. Often the companies are listed through reverse mergers with dormant shell companies.
So far, the SEC said its Cross-Border Working Group has filed more than 65 fraud cases against companies or executives, and deregistered the securities of more than 50 companies.
Blatant Manipulation and Lies Tripled Stock Price
The crux of the SEC’s issues with China MediaExpress Holdings Inc (OTCBB:CCME), and its CEO Zheng Cheng, is the misrepresentation of cash on hand. Its 2009 annual report, filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000. Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year. The actual cash balance was just $10 million.
Not only is this highly illegal but the company’s misrepresentation of cash on hand tripled its stock price.
“Investor confidence in the representations made by publicly-traded companies is critically important to the proper functioning of our financial markets,” said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. “China MediaExpress and Zheng falsely reported whopping increases in its cash balances and deceptively raised money from stock sales. Today’s action demonstrates the Commission’s commitment to policing financial fraud in the U.S. markets, regardless of whether it is perpetrated by persons who live here or abroad.”
“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”, said Carson Block of Muddy Waters who was the first to call the company a fraud in early 2011.
China MediaExpress Offered Bribe to Investigator
To add insult to injury, Zheng then offered a senior forensic accountant from a Hong Kong firm charged with the internal investigation into MediaExpress $1.5 million to “assist in the investigation”. The bribe attempt was turned down and reported.
China MediaExpress Holdings Inc (OTCBB:CCME) was delisted in May 2011 and the SEC deregistered the company’s securities in August. The SEC is now just finishing its work and the filing is a necessary formality that would allow the SEC to seek financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.