SEC forcing CXTI's hand with 2 week trading suspension, said has questions about the “accuracy and adequacy” of the company’s financial condition.
N.Y. Times Article on CXTI.PK:
"N.Y. Times article
high & low finance
In China, a Rising Star Falters
By FLOYD NORRIS
Not long ago, investors in a company called China Expert Technology thought they had a winner.
Profits were rising as the company got more contracts with local governments in China. The newest contract was from a different province, indicating the company’s reputation was spreading.
Even better, the company kept its books in accordance with United States accounting rules, rather than the presumably more flexible Chinese rules, and those books were audited by an affiliate of a major international accounting firm. And while it operated solely in mainland China, its headquarters and auditor were in Hong Kong.
Seeing a bargain, one American hedge fund manager amassed a 20 percent stake in the company. Others owned convertible securities.
Institutional investors had visited Jinjiang, a city in Fujian Province where the company had its first contract to provide what it called “e-government infrastructure and consulting services” to local Chinese governments, and had been impressed. “It was quite a show,” said one money manager, who came away with the impression that the company had great influence with local officials.
After that contract, the company branched out to other parts of that province, and in July of this year it announced its first contract outside the province. In total, the announced contracts came to about $300 million, and the company was forecasting profit of $20 million this year and $35 million in 2008.
But then, a series of events left investors wondering what was going on. There is no proof of fraud, but then again there is not much evidence to the contrary.
In mid-July, the company said its chief financial officer had resigned for “personal reasons.” Then the company disclosed that its chief operating officer had left at the end of May, “by mutual agreement.” In August, it delayed the filing of its quarterly report.
After that, silence. Phone calls from investors were not returned, and the investor relations consultant hired by the company in the United States resigned, saying he could not get information either.
“We couldn’t get management to respond,” said Jeff Feinberg, the hedge fund manager who had accumulated a 20 percent stake. He began selling shares on July 24, a few days after the chief financial officer’s departure was announced, and stepped up the sales after the company failed to file the quarterly report. But he still owns 1.6 million shares, about a quarter of his peak position.
The stock, above $7 a share in over-the-counter Bulletin Board trading before the news began to come out, has plunged. On Sept. 27, it leaped from 28 cents to 72 cents, when the company was heard from again. It filed a report with the Securities and Exchange Commission saying it had dismissed its auditors, BDO McCabe Lo Limited, on Aug. 17, although it did not explain the decision. That report was several weeks late, but some traders took heart from the attached letter from the auditors, which did not point to any problems with the company’s books.
Perhaps more important, however, was the fact that the report showed that the company had moved its headquarters to mainland China.
On Monday, with the share price at 56 cents, the S.E.C. suspended trading. There were, it said, questions about the “accuracy and adequacy” of the company’s financial condition.
That suspension will last through next week, and the S.E.C. will not discuss its investigation. One money manager, who owns China Expert securities that he now believes to be worthless, says his lawyers have been unable to confirm some of the contracts the company had announced.
Neither BDO McCabe Lo, the Hong Kong auditing firm, nor BDO International, the Brussels-based headquarters of the BDO network, which says it is the fifth-largest international accounting network, replied to e-mail messages seeking comment. Nor did China Expert’s president.
There were warnings, at least in retrospect. China Expert had gone public in the United States through a merger with a shell company, rather than through an initial public offering, which would require that the prospectus be approved by the S.E.C. It had filed a registration statement with the S.E.C., but it was never approved.
Mr. Feinberg says that his fund is up almost 30 percent this year despite losses on China Expert and that profit on other Chinese companies traded in the United States have more than offset those losses. “We’ve made a lot of money over there,” he said.
If this had happened to an American company, there would be numerous lawsuits filed by now. But suing in the United States, where China Expert has no assets or operations, appears useless, and no suits appear to have been filed in China, either.
Just because a company says it uses American accounting rules and trades in this country does not mean investors have the legal protections they have come to expect.
E-mail: norris@nytimes.com "
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