It is better late than never
In the culmination of a long, sordid story of deception and self-dealing, and a classic case of Chinese “guanxi,” the U.S. Securities & Exchange Commission announced on Wednesday, September 30th that it had reached a $55 million settlement with Focus Media and CEO Jason Jiang. The settlement involved an investigation into violations of Section 8A of the Securities Act of 1933, in specific relating to failure to adhere to disclosure and reporting requirements regarding M&A activity.
The settlement calls for Focus Media to pay more than $34 million in penalties, and the firm’s CEO Jason Jiang to cough up a total of $21 million including disgorgement and interest.
Background on Focus Media and CEO Jason Jiang
Back in August of 2012, China-based Focus Media was bought out by a private equity partnership led by the Carlyle Group for $3.6 billion. The firms include CITIC Capital Partners, FountainVest Partners, CDH Investments, China Everbright and the Carlyle Group. As reported by ValueWalk, the purchase to take the firm private raised more than a few eyebrows at the time, especially given various rumors and reports of accounting irregularities at Focus Media.[drizzle]
Equity analyst Muddy Waters offers an overview if the problems he saw at Focus Media: “…a significant overstatement of the number of screens in its LCD network and its Olympus-style acquisition overpayments. The $1.1 billion in write-downs from its acquisitions exceed one-third of FMCN’s enterprise value, making FMCN’s acquisitive behavior more destructive than Olympus’s to shareholder value. FMCN insiders have sold at least $1.7 billion worth of stock (two-thirds of FMCN’s enterprise value) since FMCN’s IPO. At the same time, the insiders and their business associates further enrich themselves by trading in FMCN assets, while costing FMCN shareholders substantial sums of money.”
Carlyle and their PE partners were apparently not worried about potential accounting irregularities as they paid a premium price for the firm and made the well-connected Jason Jiang a very rich man. In fact, given the price paid and the circumstances of the acquisitions, rumors that the purchase was really about “guanxi” (sometimes translated as “getting things done through connections or personal relationships”) and greasing the wheels for future deals in China surfaced almost immediately.
Details on SEC allegations in settlement
An excerpt from the SEC’s Administrative Proceeding of September 30th offers an overview of the case: “Focus Media’s and its founder and Chief Executive Officer Jiang’s negligent failure to disclose accurate information concerning Focus Media’s partial sale of securities in its wholly-owned subsidiary Allyes Online Media Holdings Ltd. (“Allyes”) to certain Allyes and Focus Media insiders at a favorable price, months before both the insiders and Focus Media sold their interests in Allyes to a private equity firm at nearly six times the price the Allyes and Focus Media insiders had paid.”
Focus Media planning to relist in China
The Wall Street Journal reported a few weeks ago that Focus Media Holding, which delisted from the U.S. Nasdaq market two years ago when it was taken private, has apparently found another vehicle through which to relist in China (an earlier attempt failed due to the dubious legal history of a principal in the listing firm).
Of note, the planned listing in the stock market in Shenzhen, China would see Focus Media with a valuation more than double the $2.6 billion it was valued at when it delisted in 2013, even though Chinese stock markets are down more than 30% in the last few months.[/drizzle]