Deloitte sued over US-listed ChinaCast Education

ChinaCast came under pressure last year following the departure of its CEO, Ron Chan. The company said at the time that it had uncovered questionable activities and transactions involving Chan that could amount to illegal conduct. He denied the allegations of wrongdoing. After failing to file its 2011 annual report, ChinaCast slid from NASDAQ to the Pink Sheets.

The plaintiffs, including Fir Tree Value Master Fund, Columbia Pacific Opportunity Fund, Lake Union Capital Fund and Ashford Capital Management, claim that Deloitte failed to detect "a brazen looting" as ChinaCast assets were transferred to an entity owned by Chan, Reuters reported. "Deloitte put its name and brand behind the certification of financial statements that were almost entirely false," the complaint goes on to say.

Deloitte's Shanghai-based affiliate audited ChinaCast's annual reports between 2007 and 2010. The big four firm's US affiliate is also named in the complaint on the grounds that one of its partners was a key audit team member for issues involving US accounting compliance.

The case will do little to enamor mid-cap Chinese companies to US investors, who are already wary of the stocks following a spate of accounting scandals in the past two years. Many of these companies entered the US through reverse mergers - whereby a dormant listed vehicle is purchased and assets are injected into it - because it is quicker and cheaper and involves less regulatory oversight than an IPO.

ChinaCast, which provides post-secondary education and e-learning services, was set up in 1999. It received seed funding from Hong Kong-listed Technology Venture Holdings before a first round of institutional funding in 2000, involving Hughes Network Systems, Intel Capital and SUNeVision. After a second round in 2003, the company went public in Singapore in 2004. The reverse merger was completed three years later.

Deloitte has already been charged by the US Securities and Exchange Commission (SEC) for failing to hand over documents related to its audit of Longtop Financial Technologies, another US-listed Chinese company under investigation for fraud.

In December 2012, the SEC charged the Chinese affiliates of Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers and BDO for refusing to cooperate in investigations of nine Chinese companies. The audit firms say they are in a position of violating both US and Chinese law - the former demands they share documents while the latter requires that they do not.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Regulation
• Greater China
• North America
• regulation
• professional services
• China
• USA
• Us securities and exchange commission (sec)