Court Appointee Chases (and Finds) Investor Cash That Vanished in China; For some U.S. investors trying to hold Chinese companies to account for accounting fraud, Robert Seiden could be the last, best hope. More than 170 U.S.-traded Chinese companies have faced accounting or disclosure questions since 2011

http://www.wsj.com/articles/court-appointee-chases-and-finds-investor-cash-that-vanished-in-china-1434918506

Court Appointee Chases (and Finds) Investor Cash That Vanished in China

Receiver Robert Seiden settled with Shengtai Pharmaceutical and is pursuing others

 

MICHAEL RAPOPORT

June 21, 2015 4:28 p.m. ET

For some U.S. investors trying to hold Chinese companies to account, Robert Seidencould be the last, best hope.

Shareholders lost billions of dollars when a wave of U.S.-traded Chinese companies were tarnished by accounting and disclosure concerns in recent years. But U.S. investors have largely been stymied when pursuing Chinese companies in court. Many have simply “gone dark,” abandoning U.S. markets and ignoring U.S. court judgments, and it is hard for investors to go after them in China’s semiclosed society.Now, Mr. Seiden, a court-appointed receiver charged with leading the pursuit of several Chinese companies on their shareholders’ behalf, may have found a way. He reached his first settlement last week, for $3.7 million, with Shengtai Pharmaceutical Inc., which had previously failed to comply with a court judgment. Mr. Seiden said he is close to a settlement with a second company, as well.

“We are getting justice and money back for U.S. investors who were heretofore hopelessly being left in the dirt by these companies,” Mr. Seiden said.

Investing in China is hot again, and many investors in larger, newer Chinese companies haven’t encountered any problems like the ones Mr. Seiden is trying to settle. But his efforts are a reminder past disputes over Chinese companies still sting for many investors.

“I’m 83 going on 84. I don’t have much time left,” said George Vlahos, a retired Byfield, Mass., educator who lost several hundred thousand dollars in Sino Clean Energy Inc., the company with which Mr. Seiden hopes to settle soon.

Some experts on China said Mr. Seiden’s approach may hold promise. But others are skeptical, concerned that China-based executives may resist cooperating with a foreign receiver. “I don’t see the magic bullet yet,” said Edward J. Epstein, a Troutman Sanders LLP lawyer in Shanghai.

Under the settlement finalized last week, Shengtai, which makes starch and glucose products for use in pharmaceuticals, agreed to pay $3.7 million to buy back the stake held by its major outside shareholder, Pope Investments LLC, according to previous drafts of the settlement agreement seen by The Wall Street Journal. Mr. Seiden’s office says the final settlement uses the same terms.

Shengtai was never accused of accounting fraud, but it had ignored a 2014 Delaware Chancery Court judgment ordering it to open its books to Pope, after Shengtai’s chief executive withdrew a going-private offer and Shengtai gave up its registration to trade on U.S. exchanges. Pope didn’t respond to requests for comment.

Liu Qingtai, Shengtai’s chief executive, couldn’t be reached for comment, and Ren Baowen, Sino Clean’s CEO, didn’t respond to requests for comment. An American attorney who represents Sino Clean declined to comment. U.S. regulators haven’t charged either company or any of their officials with any wrongdoing.

More than 170 U.S.-traded Chinese companies have faced accounting or disclosure questions since 2011. The Securities and Exchange Commission has filed about 30 civil fraud cases and reached a number of settlements, as have some shareholders who filed class-action lawsuits.

But most settlements have been small. Many Chinese companies ignored court judgments levied on them and simply stopped communicating with the SEC and U.S. investors. The SEC has revoked more than 120 Chinese companies’ registrations to trade in the U.S.; dozens more have surrendered their registrations voluntarily.

Mr. Seiden entered the picture in 2013, when a Delaware judge held Chinese network-equipment maker ZST Digital Networks Inc. in contempt for ignoring an order to open its books to a U.S. investor. The judge ordered ZST to pay the investor $32 million and said a receiver should be named to help collect the judgment.

David Graff, a lawyer representing the investor, knew Mr. Seiden from another case and asked him to apply. A Marine’s son who grew up in Brooklyn, N.Y., Mr. Seiden had been a prosecutor in former Manhattan District Attorney Robert Morgenthau’s office and later founded his own investigation firm, Confidential Security & Investigations.

He had worked in China, conducting corporate due diligence and background checks, and as a monitor for the Port Authority of New York and New Jersey sniffing out waste, fraud and abuse in the building of the Freedom Tower on the former World Trade Center site.

Mr. Seiden said his strategy is to capitalize on a structure Chinese companies often use to get around their government’s restrictions on foreign investment. In a number of the cases under Mr. Seiden’s purview, the corporate entities that owned the companies’ China-based operating assets were actually owned by subsidiaries located outside China, in areas like the British Virgin Islands or Cayman Islands.

The 52-year-old receiver used his authority to work through those regions’ courts to gain control over the subsidiaries. With Shengtai, the subsidiary, Shengtai Holding Inc., was based in New Jersey. For Sino Clean, he seized Wiscon Holdings Ltd., a Hong Kong subsidiary, court documents show.

That enabled him to go into China not as a foreign creditor who could be brushed aside but as the assets’ legal owner. “You’ve got to go in standing in the shoes of the company,” he said.

With Shengtai, Mr. Liu signed an agreement with Mr. Seiden last November to work toward a settlement, according to court papers. But with Sino Clean, Mr. Seiden has been battling Mr. Ren, who the receiver said reneged on a promise to hold director elections and disclose current financial information. It took a three-hour meeting in February in the Chinese city of Xi’an to get the two sides on the road that led to the pending Sino Clean settlement.

Courts have also appointed Mr. Seiden receiver for companies like Southern China Livestock Inc. and Yinlips Technology Inc. He is also trying to enforce a $367 million Delaware court judgment against former executives of ChinaCast Education Corp. Southern China Livestock, Yinlips and the former ChinaCast officials didn’t respond to requests for comment.

Mr. Seiden expects his fees and those of the lawyers and other professionals he uses to total about $550,000 in the Shengtai case, a portion of which will be borne by Mr. Liu as part of the settlement. Mr. Seiden’s own fee will be about $120,000 of the $550,000. He is paid primarily out of the assets he recovers, subject to court approval, so future fees depend on his ability to seize assets or settle with the companies’ executives.

Investors battling other delisted Chinese companies are pulling for him to earn more. “I have closely followed his efforts in China,” said Michael Sammons, an investor in three Chinese companies for which Mr. Seiden may be named a receiver. “[I’ve] frankly been amazed at his progress.”

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