SHANGHAI — One of China’s biggest commercial vehicle dealerships is among the dozens of Chinese companies with shares listed in the U.S. that have been targeted by short-sellers for alleged financial abuses or probed by regulators. Its case highlights how gray shades of business dealings in China can run afoul of American rules in black and white.
Founded by tycoon Li Yonghui, AutoChina is based in the hardscrabble northern Chinese city of Shijiazhuang and says it has 512 branches and has leased more than 33,000 trucks since it launched in 2008. In an interview with The Associated Press, Li seems genuinely puzzled by his company’s predicament.
A probe of AutoChina by the Securities and Exchange Commission into allegations of market manipulation is complicated by frictions between U.S. and Chinese authorities over the sharing of financial information, a lack of transparency, and outright clashes of business cultures and practices. It was delisted from the Nasdaq last year after falling behind on its financial reporting.
In April, the SEC said it was suing 11 AutoChina investors and Hui Kai Yan, one of the company’s directors, for allegedly placing fraudulent trades to create the false impression that the stock was traded more actively. The regulator said the company and the investors made hundreds of questionable trades starting in October 2010, using more than $60 million that had been deposited into U.S. brokerage accounts.
“Investors may think many Chinese companies are faking their accounts, and that may be true, I’m afraid, but I have never had any problems,” Li said.
“Our company has had no problems either in terms of its operations or its finances,” he said.
Like many other foreign companies with U.S. shares, AutoChina used a reverse merger to list on the Nasdaq. This backdoor procedure enables a company to become publicly traded by buying an already-listed shell company and avoiding the more rigorous process of an initial public offering.
AutoChina’s onslaught of bad news started in late January 2011 when analysts using the name “The Forensic Factor” issued a report questioning its accounting practices. The SEC began a probe into AutoChina’s financial disclosures in April 2011. The company’s shares are now relegated to trading on the Over-The-Counter Bulletin Board, a market of corporate flotsam that requires less financial disclosure than mainboard stock exchanges.
The SEC crackdown on market abuses and shady accounting practices has coincided with a sharp rise in the number of class-action lawsuits filed against foreign issuers of securities, which more than doubled in 2011 according to a study by audit company PwC. Almost two-thirds were against mainland Chinese companies.
“I wouldn’t necessarily call it a witch hunt, but there are legitimate companies that could get caught up in a sense,” said Neal R. Marder, a partner in Los Angeles at law firm Winston & Strawn LLP. He has represented at least two Chinese companies that have sought to fight back.
Chinese government rules barring accounting firms with operations in China from sharing information with authorities overseas have hindered SEC efforts to investigate in such cases. “Accounting firms as well as any business in the PRC have to abide by trade secrets laws, privacy protections and blocking statutes in China,” said Marder.
After two decades of doing business under China’s capricious legal and political system, Li is no stranger to a fight. A foray into real estate investment in the late 1990s that involved an attempted takeover of a state-owned real estate company put him at odds with top local leaders. They detained him for several months until he gave up the takeover bid.
Li and Diana Liu, a Taiwan-born Canadian citizen and AutoChina board member whose Spring Creek Investments was the vehicle AutoChina used to list on Nasdaq, vehemently deny they or the company played any role in the share trades questioned by the SEC.
Liu contends that the investors named in the complaint were simply backing the company through an “investment club” that involved pooling their savings for occasional online trades.
“It’s not like in the U.S., where when an investor wants to buy or sell he goes to the bank or does it online. In China they tell the person in charge of handling the trades who wants to sell and who wants to buy. He does the transactions for them,” she said.
At the heart of AutoChina’s troubles, Li said, were difficulties over getting its former auditor PriceWaterhouse Coopers to approve its 2010 financial reports. Eventually AutoChina replaced PwC with another U.S. auditor, but by the time it filed its earnings, it was due to be delisted.
“We appealed, but without any explanation at all they said they would not allow us to continue to be listed. Is that transparent? Why did my company have to delist? Up to now nobody has explained it,” Li said, his frustration showing through his calm, soft-spoken demeanor.
Some of the short-sellers’ accusations were false, AutoChina contends. However, the company did respond to complaints over an “earn-out” in its share listing that awarded shares to Li, thus diluting the value of holdings of existing shareholders, by cancelling that provision.
While waiting for the case to go to court, Li said he is busy expanding AutoChina’s insurance business and other services.
“My intention is to build up a vehicle-leasing ‘McDonalds,’” he said.
But the barrage of questions over Chinese company shares is discouraging mainland companies from attempting listings. Many are opting to go private, or to reconsider listing in Hong Kong or other overseas markets.
“We considered whether to list in China, in Hong Kong or in the U.S. I thought that America would be the most open, most just and most transparent environment, the most favorable for business. Now, I believe that is not the case,” Li said. “If I were to have another chance, I probably would not choose this route.”
• Researcher Fu Ting contributed to this report.