US SEC blocks stock offering by 2 Chinese companies

By Sarah N. Lynch

WASHINGTON (Reuters) – U.S. securities regulators moved to stop two Chinese companies from selling their privately-held shares to investors on Monday, the latest effort by officials to crack down on questionable financial statements by foreign-based companies.

The Securities and Exchange Commission said it had begun so-called “stop order proceedings” against China Intelligent Lighting and Electronics Inc and China Century Dragon Media Inc.

Both companies had their publicly-held stock suspended on NYSE Amex in March, and the exchange has initiated a delisting proceeding against them.

The SEC decided to institute the stop order proceedings against the companies to prevent them from selling their privately-held shares after the independent auditors for both companies withdrew their audit opinions and resigned.

The SEC said the move was needed because the registration statements were “materially misleading.”

Michael Quinn, an attorney for China Intelligent Lighting and Electronics, and a partner at K&L Gates, called the SEC’s actions on Monday “moot.” He said the company already filed on Friday to withdraw its securities registration statement in light of the issues raised by its auditor.

An attorney for China Century Dragon Media could not be reached.

Since last year, the SEC has been actively probing accounting and audit problems that have arisen with companies headquartered in China, Hong Kong and other countries that seek to access U.S. capital markets. Many of these companies gained that market access through reverse mergers with U.S. shell companies.

In this case, however, both companies went through the more lengthy initial public offering process.

The SEC’s probe so far has led to numerous trading suspensions, often amid auditor resignations and other accounting irregularities.

Last week, the agency issued an investor warning about reverse mergers, saying that companies often “fail or struggle to remain viable” and urged people to beware of those that fail to file financial reports.

Many of the companies that have been the target of SEC enforcement actions have been small in size, with the bulk of their operations based overseas.

Based on their March prices, China Intelligent Lighting had a market capitalization of $28 million and China Century Dragon Media was at $41 million.

According to SEC filings, the auditing firm MaloneBailey LLP served as the independent auditor for both companies until March when it submitted resignation letters due to accounting problems. In both cases, the audit firm expressed concerns about accounting fraud, including forged bank statements.

China Intelligent Lighting disclosed it hired a new auditing firm, Friedman LLP, in April, but has still been unable to file an annual report for the year ended Dec. 31, 2010, because of the accounting problems. (Reporting by Sarah N. Lynch; additional reporting by David Gaffen; Editing by Tim Dobbyn)