Fraud in books chills US in­vestors

China Daily (Canada) - - ACROSS AMERICA - By KELLY CHUNG DAW­SON in New York kdaw­son@chi­nadai­lyusa.com

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.”

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