Subpoena Enforcement Action in the Face of Deloitte & Touche in Shanghai

Michelle Remo, “Big 4″ observer
September 08, 2011 /

Deloitte Touche Tohmatsu CPA Ltd. is facing a subpoena enforcement action filed by the Securities and Exchange Commission (SEC) for failing to produce documents linked to the SEC’s investigation into possible fraud by the Shanghai-based public accounting firm’s longtime client Longtop Financial Technologies Limited.

A subpoena issued by the SEC on May 27, 2011 required Deloitte Shanghai to produce documents by July 8, 2011, stated SEC’s application and supporting papers filed in U.S. District Court for the District of Columbia. During its stint as auditor to Longtop, Deloitte discovered bookkeeping fraud at the company. Deloitte Shanghai was Longtop’s auditor since at least 2007.

The SEC is currently conducting its own investigation into the Longtop fraud, and is requiring Deloitte to comply with a subpoena to turn over those records.

Last month, Longtop said it received a Wells notice from the SEC, which warned that the agency’s staff has decided to recommend filing an enforcement action against the company, Financial Times reported.

Earlier than that, the New York Stock Exchange delisted Longtop Financial Technologies prior to the opening of August 17 trade.

Longtop is a foreign private issuer whose American depositary shares (ADSs) traded on the NYSE from the date of its initial public offering in October 2007 until May 17, 2011, when the NYSE halted trading prior to delisting Longtop’s securities in August 2011. When trading was halted, Longtop’s ADSs were priced at $18.93 per share with 57 million shares outstanding, resulting in a market capitalization of approximately $1.08 billion.

Although Deloitte Shanghai holds “vast amounts of documents” responsive to the subpoena, it has not produced any documents to the SEC to date, the SEC said. As a result, the SEC is unable to gain access to information that is critical to an investigation that has been authorized for the protection of public investors.

“Compliance with an SEC subpoena is not an option, it is a legal obligation,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

“The ability of the SEC to conduct swift and thorough investigations requires that subpoena recipients promptly comply with that legal obligation. Subpoena recipients who refuse to comply should expect serious legal consequences,” Khuzami added.

Deloitte consented that its audit reports for Longtop could be filed annually with the SEC while knowing full well that they would be relied upon by U.S. investors, court papers said.

On May 22, Deloitte Shanghai resigned as Longtop’s auditor after discovering numerous improprieties during an audit for the year ended March 31, 2011. In its resignation letter, which was included in a Form 6-K furnished by Longtop on May 23, D&T Shanghai identified numerous indicia of financial fraud at Longtop and indicated that D&T Shanghai’s prior year audit reports for Longtop could no longer be relied upon by investors.

As part of the Longtop investigation, the SEC staff issued and served the subpoena on D&T Shanghai seeking production of documents related to the incomplete audit of Longtop for the year ended March 31 as well as prior year audits that D&T Shanghai completed.

Court papers revealed that these documents may reveal information about Deloitte Shanghai’s discovery of false financial records at Longtop, how any fraud schemes at Longtop were able to continue undetected, and basic information necessary to ferret out whether there was a fraud, who was behind it, how significant it was, and how it was conducted.

The SEC is seeking a court order directing Deloitte Shanghai to show cause why the court should not enter an order requiring the accounting firm to produce documents responsive to the subpoena.


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