Fraud in books chills US investors
A recent US Securities and Exchange Commission probe into potential securities violations by China-based pork company AgFeed Industries may impact confidence among American investors with USlisted Chinese companies, experts said this week.
The company, which filed for bankruptcy in July with acknowledgement of “fictitious sales” logged between 2008 and 2011, is accused of misrepresenting “formula-based analysis” of its accounts, overstating assets and underreporting debts and expenses to create an illusion of increased profitability.
Additionally, the company is alleged to have “created fraudulent account receivables”, underreporting revenue figures for divisions intended for sale by more than $50 million in 2008 and 2009 and by $21.3 million in 2010.
AgFeed Industries operates five manufacturing facilities across China, producing hogs for slaughter and breeding.
The discrepancies were first noted in 2011, in a complaint filed by shareholders against the company. But details were not made public until this week, when Bloomberg News released documents provided by former AgFeed director Milton Webster.
Among the emails unearthed in the investigation was an exchange that detailed the full knowledge of AgFeed managers regarding bogus revenue figures.
“Sometimes I really want to work well on the real stuff, but the need to balance the falsified data often takes up my time,” wrote AgFeed manager Wu Jiangqi in an email to then-CEO Xiong Junhong.
Xiong responded that the issue could “only be resolved by money”, noting that the company was in the process of “thinking of ways to get 30 to 40 million to resolve this”.
Webster, who died earlier this month of natural causes, joined AgFeed’s board in February 2011, and resigned in February 2012 when his protests against the company’s accounting practices went unheeded.
In an interview before his death, he said that Agfeed’s management “didn’t give a damn about corporate governance”.
The fact that the fraud was not discovered by auditors should serve as a warning to American investors to be prudent when working with US-listed Chinese companies, said Lynn Turner, a former SEC accountant. “What’s the difference between investing in a Chinese company where you can’t do your homework and going to Las Vegas to play at the craps table?” Turner asked. “At least at Las Vegas you get some entertainment value.”