On January 4, 2012, a magistrate judge granted the request of the US Securities and Exchange Commission ("SEC") for a hearing to decide whether to order the Shanghai office of Deloitte Touche Tohmatsu CPA Ltd. ("Deloitte Shanghai") to produce documents related to its work as the outside auditor of Longtop Financial Technologies, Ltd ("Longtop" or the "Company"). This proceeding will decide important issues bearing on the SEC's ongoing enforcement action against Longtop, a publicly traded Chinese company. The magistrate judge's decision closely follows the SEC's deregistration of Longtop on December 14, 2011 for failing to file required annual reports and audited financial statements with the SEC. Longtop's securities are now substantially worthless.
The hearing will also highlight tensions between the SEC and Chinese issuer and auditor regulators who have failed to reach a written agreement on mutual assistance in securities investigations and supervision of audit firms despite talks during the summer of 2011. This sets the stage for either resolution of those tensions through negotiation or increased conflict between the two regulatory systems with unknown consequences for issuers and auditors in both capital markets.
Increased regulatory resources, enhanced financial penalties, demands by Congress for SEC and PCAOB action, aggressive steps by the SEC to move against registrants, involvement of the US Department of Justice ("DOJ"), and tensions between US and Chinese regulators all contribute to substantial enforcement risks for US-listed Chinese companies and their outside auditors. Chinese companies and their auditors should take immediate steps to mitigate these risks and to avoid or manage SEC and DOJ investigations.
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