Two years ago, investors pulled out of their equity holdings in some of China’s biggest companies. The reason? Lack of trust in the companies’ disclosures.
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Now, the SEC has charged Sky One Medical with falsifying earnings. It’s a rare action, alleging that the company falsified almost $20 million worth of export sales.
Sky One Medical makes Chinese medicines and used to trade on the Nasdaq. The SEC move signifies an elevation of allegations since 2010 that small Chinese companies have lied to investors and misrepresented the extent of their businesses.
Many of the companies have been delisted from the Nasdaq but until now, no charges had been made since it is very difficult to gather evidence.
What began as some questions about US-listed Chinese companies has spread more broadly to also include larger companies.
China’s response has been to further limit information about its companies, increasing interest among short sellers. A letter was sent earlier the week of September 3 saying that short sellers had been spreading rumors about Chinese stocks to influence US investors.
At the same time, credit was given the short sellers for exposing some of the inaccuracies of company reports.
The charges against Sky One Medical represent the sixth time the SEC has brought charges against a Chinese company during 2012. Other charges included insider trading, stock price manipulation, and non-disclosure of loans from related parties.
If you have investors who have holdings in Chinese companies, even through mutual fudns or ETFs, you may want to do some due diligence and have a conversation with your cilents about these types of disclosure risks