The company, as firstly presented to investors, had an appealing Board of Directors with a long Chinese experience. However, the research of Citron outlined two monumental issues: – Management background misdeeds: a company listed on the NYSE theoretically should not be driven by someone convicted by a high court Judge for “fraudulently stealing customers from its former employer”; – Disclosure: full disclosure is needed in order to allow investors take an educated decision with all available information; in this case, the Chairman and the CEO did not properly disclose their track records.Moreover, LEFT human resources management was suspicious: even though SLURS had LEFT as the only customer and shared part of the name with it, Longest claimed to be unrelated to it. Andrew Left also proved that they shared both the building and email domain. This organizational structure allowed them to have more flexibility, hide labor costs through transfer pricing mechanisms, and shift assets and transactions off balance sheet.The audit committee failed to control properly: only 4 years after the PIP, and in conjunction with the release of the Citron report, they started doubting about the existence of revenues and cash accounts, and finally decided to resign.
In addition, since the audit committee Chairman, the SCOFF and the auditors all knew each other from university or previous employment, their work Anton be deemed truly independent and conflicts of interest are inevitable.As regards the investment banks (Goldman Cash and Deutsche Bank) that listed the company in US, we believe that they could have done a deeper financial analysis and background research on the company and its management. Another prove of their superficiality is given by the fact that the company has been delimited Just 4 years after the PIP.
What is the problem between China and the United States that is preventing the SEC from prosecuting this case?How can it be resolved? Investors is the substantial difficulty in obtaining the documents to certify the fraud: n fact, Dolomite is not able to write an audit working paper according to American laws. The relevant issue consists in the fact that the Chinese Dolomite branch could not submit any sort of documents to the SEC without incurring in a stern punishment.This means that TTS could not provide the required documents without the authorization of Chinese regulatory agencies and, moreover, it would have also implied foreign secrecy laws application. One possible solution to the problem would be to prevent Chinese companies from listing in the American market as long as the Chinese disclosure requirements are not aligned with the SEC standards.Nevertheless, this is a very extreme option that could negatively influence the diplomatic and economic relations between the two countries.
A more moderate solution, even if onerous and time expensive, would be, as Dolomite suggests, trying to figure out a compromise with the China Securities Regulatory Commission in order to obtain the right to disclose the documents. Such an agreement would certainly require the honesty of the banking officials, which has not always been so clear in China.