Dan David of GeoInvesting has an interesting post today about how the SEC has done an excellent job protecting Chinese investors who have been ripped off in EB-5 investor scams. The EB-5 program offers green cards to foreigners who make job creating investments in the US. It is really a process of selling green cards to wealthy foreigners, most of whom are Chinese. Even Donald Trump has financed real estate projects with funds obtained from Chinese investors under the EB-5 program.
David points out that while the SEC has succeeded in helping Chinese investors get back most of their money from EB-5 scams, it has done very little to help US investors get money back from scams by US listed Chinese companies.
As David points out in his post, the only CEO to be jailed for defrauding US investors was Dickson Lee of L&L Energy. Lee, however, was a US citizen and was arrested on US soil, so Chinese authorities could not protect him.
Perhaps the most egregious case was Ming Zhao of Puda Coal, who faces a $250 million judgment from the SEC for ripping off U.S. shareholders. But Chinese authorities have not helped the SEC to enforce the judgment, and instead elevated Ming Zhao to the Eleventh Standing Committee of the Chinese People’s Consultative Congress. I guess he is viewed as a model comrade.
Now we have the case of ZTE which was recently accused by the Commerce Department of circumventing export restrictions by selling products with sensitive American technologies to Iran, despite having agreed to the export restrictions. The US actions likely make it difficult for American companies to serve as suppliers to ZTE. China has screamed foul, saying the US actions would severely affect the normal operations of Chinese companies.
There was also the recent case where the Bank of China’s New York branch refused to comply with a US court order to turn over customer information related to a counterfeiting case. After facing $50,000 a day fines, the Bank of China relented and turned over the information.
It is becoming clear that Chinese regulators are playing US regulators for fools. They are protecting Chinese fraudsters and thereby creating a safe harbor for those who wish to commit fraud against US investors. At the same time, they welcome application of the rule of law in the US to protect Chinese investors. US regulators are letting them have their cake and eat it too.
The PCAOB has been unable to negotiate an arrangement to conduct inspections of Chinese audit firms, which seriously undermines protection of US investors in Chinese companies.The SEC has been unable to bring Chinese fraudsters to justice; as long as they stay in China they remain outside of the grasp of US regulators. China has shown no interest in prosecuting Chinese fraudsters for crimes committed in China that are clearly crimes in China, apparently on the basis that victims of the crimes were not Chinese. And US regulators have had little success in getting cooperation from Chinese regulators at bringing the fraudsters to justice in the United States.
What China is doing is a version of the poker strategy of shooting the angles. In poker, angle shooting is the act of using various underhanded, unfair methods to take advantage of inexperienced opponents. The difference between angle shooting and cheating is simply a matter of degree.
The SEC and PCAOB should take a lesson from the Bank of China case. When the pain was great enough, China backed down and produced the documents. The SEC got a partial victory against the Big Four accounting firms in China when it threatened to ban them because China would not allow the production of documents. I believe that if the SEC/PCAOB can make a credible threat that they will kick Chinese companies off US exchanges they can get China to prosecute fraudsters who rip off US shareholders, to help recover funds, and to properly regulate auditors and listed companies.
I don’t agree with Donald Trump on many things, but I do agree with this position on China: The most important component of our China policy is leadership and strength at the negotiating table. We have been too afraid to protect and advance American interests and to challenge China to live up to its obligations. That has clearly been the problem with protecting US investors in US listed Chinese companies.