SEC Action to Enforce Subpoena: New Front in Investigating Chinese Companies

On Sept. 8, 2011, the Securities and Exchange Commission (SEC) filed with the U.S. District Court for the District of Columbia an application for an order to show cause why the Shanghai-based accounting firm Deloitte Touche Tohmatsu CPA Ltd. (DTT) should not be ordered to comply with a subpoena the SEC issued several months earlier.¹ The SEC’s subpoena had followed DTT’s May 2011 resignation as the auditor for Longtop Financial Technologies Limited, a China-based software company with shares listed on the New York Stock Exchange. DTT had resigned after finding evidence of potential fraud and accounting irregularities at Longtop. In negotiations with the SEC over the subpoena, DTT’s counsel took the position that Chinese “state secrets” and privacy laws precluded DTT from complying with it.

The SEC’s court action seeking compliance with the DTT subpoena marks the latest development in its ongoing efforts to respond to the growing allegations of accounting and other fraud at U.S.-listed Chinese companies, many of which were listed through so-called “reverse merger” transactions, where private Chinese companies merged with U.S.-listed shell companies. The SEC’s need for court intervention in its efforts to enforce a subpoena—something that the SEC rarely has had to do—exemplifies the challenges it faces in investigating U.S.-listed Chinese companies, and the manner in which its application gets resolved will have broader implications on how it and other regulators can obtain documents and information from Chinese and other foreign companies generally.

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