[Flashback] Chinese Rogue Executives Dodge Singapore Law by Staying Home


Posted by Amy CHAN Wen Yi, Year 4 undergrad at the School of Accountancy, Singapore Management University

Singapore investors are demanding tougher rules to prosecute executives of China-based companies traded in the city-state after scandals from New York to Hong Kong have wiped out the market value of such firms.

U.S. and Hong Kong regulators have been ramping up Chinese company probes as Muddy Waters LLC said last month that Sino-Forest Corp. overstated its timber holdings, erasing as much as 82 percent of the China-based tree plantation owner’s market capitalization in Toronto.

With more than one in 10 Chinese firms listed in Singapore delisted or suspended since 2008, regulators must seek a balance between the need for investor protection and a desire to attract companies to Singapore’s exchange. Lawyers said executives of Chinese firms that trade in Singapore, so-called S-chips, are beyond the reach of current law as long as they remain in China.

“Some of these rogue executives are unreachable by staying in China,” said former lawyer David Gerald, who is president of the Securities Investors Association (Singapore), which represents 70,000 retail shareholders. “We can’t afford to have another scandal and let investor confidence wane further. We need to get this problem arrested from Singapore to the U.S.”

The association has been seeking safeguards from the island’s exchange for at least a year, including ensuring funds are accounted for after leaving the city, Gerald said.

Suspended or Delisted

At least 20 Chinese firms on the exchange, where one in five stocks are China-based, have been suspended or ordered to delist since 2008. There were 152 China-based firms listed on Singapore’s S$893 billion ($727 billion) stock market at the end of June, according to the exchange. The FTSE Strait Times China Index of 63 Chinese stocks has lost 11 percent this year, compared with a 1.3 percent slide in the Straits Times Index.

There is little that anyone outside China can do to pursue executives or companies there, said Mak Yuen Teen, an associate professor at the National University of Singapore’s Business School and co-director of the Corporate Governance and Financial Reporting Center. The lack of an extradition treaty means company officials can’t be compelled to return, and foreign court orders aren’t recognized in China, he said.

“The legal hurdle is the key concern when all you have is a listed shell and everything else is offshore,” said Sim Kwan Kiat, head of business finance and insolvency at Singapore’s Rajah & Tann LLP. “The rules are there; it’s an issue of enforcement.”

‘Flagrant, Blatant Breach’

Singapore should have separate laws governing listed companies, said Walter Woon, who heads the steering committee overseeing proposed changes to the Companies Act.

“Even if there’s a flagrant, blatant breach of our laws, we can’t touch the guy because certain sections of our Companies Act don’t apply to foreign entities,” said Woon, Singapore’s former attorney general. “The culprits can thumb their noses at us. We should at least consider making some of the basic rules on corporate governance apply to foreign companies that want to list here, even if this scares away some people.”

The Singapore, New York, London and Tokyo exchanges were given permission to open offices in China in 2007 to lure companies from the world’s most populous nation seeking to tap international capital markets.

“The common concern is, in the big rush to get these Chinese firms to list overseas, has the safety net been compromised?” said Tan Han Meng, an analyst at DMG & Partners Securities. “Now regulators from SGX to SEC are trying to see what comfort they can give to investors.”

SEC Warning

Short-sellers including Carson Block’s Muddy Waters have questioned the accounts of Chinese firms listed in North America.

On June 9, the U.S. Securities and Exchange Commission warned investors about buying stakes in companies that gain listings on its exchanges through reverse takeovers as they may be prone to “fraud and other abuses.” Chinese companies have used such takeovers to list shares in the U.S., avoiding the regulatory and investor scrutiny of an initial public offering.

The SEC has revoked the registrations of at least eight Chinese companies since December and more than 24 firms have disclosed auditor resignations or accounting irregularities to it since March, Chairman Mary Schapiro wrote April 27.

U.S. and Chinese officials will meet July 11 to 12 to discuss giving American securities regulators the right to investigate companies within China for the first time, said two Chinese officials with direct knowledge of the plans who asked not to be named because the talks are private.

“Corporate governance practices have evolved worldwide and Chinese companies that list overseas don’t seem to have caught on,” Gerald said. “Investors are losing confidence in Chinese companies, not just in Singapore but elsewhere including the U.S.”

Imprisoned Director

In March, a Singapore court sentenced Peter Madhavan, a former independent director at Singapore-based freight forwarder Airocean Group Ltd., to four months in prison for his role in making a misleading regulatory filing. Madhavan is appealing his sentence and conviction, according to his law firm, Drew & Napier LLC.

“The regulators may not be able to go after the real perpetrators in Chinese companies, but they can go after the independent directors to make a point,” said Robson Lee, a lawyer and an independent director at China-based Youcan Foods International Ltd. “You could go to jail if something goes terribly wrong, all for an annual director’s fee of S$50,000.”


China Gaoxian Fibre Fabric Holdings Ltd. is the latest Singapore-listed Chinese firm to report accounting inconsistencies. The Zhejiang-based maker of polyester yarn said June 30 its auditors at PricewaterhouseCoopers LLP discovered the company’s bank balance should be less than a tenth of the 1.1 billion yuan ($170 million) it reported in its earnings.

“The exchange’s sanctions are limited to reprimand, suspension and delisting,” DMG’s Tan said. “A share suspension is very frustrating for investors and they’re held hostage. In a delisting, they could be staring at negative returns.”

In the case of FerroChina Ltd., shareholders lost their entire investment when the steelmaker was forced to delist in March 2010 after being suspended for more than a year. The company, which hired Merrill Lynch & Co. in April 2008 as an adviser to help it be “the world’s largest and most efficient independent galvanized steel manufacturer,” defaulted on loans in October of that year, weeks after reporting quarterly net income had tripled.

Fires, Stolen Trucks

Other stocks that have been suspended include Sino Techfibre Ltd., which said a fire destroyed its financial records after reporting accounting flaws, and China Sun Bio-Chem Technology Group Co., which said a truck transporting its accounting records was stolen.

Singapore, which the World Economic Forum said has the highest corporate governance standards in Asia, said it plans to overhaul its Companies Act, which may include rules allowing shareholders to sue directors. The city has also proposed increasing independent directors’ responsibilities.

The Monetary Authority of Singapore said in an e-mail that it’s “constantly looking at ways to enhance our regulatory regime in order for us to maintain our reputation as a well-regarded financial center.”

The city state will “thoroughly investigate” and take appropriate enforcement action when its securities laws have been breached, the authority said.

In 2004, China Aviation Oil (Singapore) Corp. revealed a $550 million derivatives fraud, Singapore’s biggest financial scandal since Nick Leeson’s $1.5 billion trading loss brought down Barings Plc. Chen Jiulin, China Aviation’s former Chief Executive Office, became the first person imprisoned in Singapore for insider trading after he returned from China.

The accounting scandals at some Chinese companies and the lack of prosecutorial powers highlights the challenges of cross-border transactions, Woon said.

“Laws are generally a generation behind technology,” Woon said. “Legal systems can’t handle the cross-border nature of business today.”


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