China MediaExpress CFO Quits, Auditor Calls for Inquiry of Bus Advertiser
China MediaExpress Holdings Inc. (CCME), the provider of advertising on buses in China whose stock has been halted since March 11 after losing 48 percent in six weeks, said Chief Financial Officer Jacky Lam and auditor Deloitte Touche Tohmatsu resigned.
The Hong Kong-based company will delay its fourth-quarter results and miss the March 16 deadline for filing its annual 10- K report with the U.S. Securities and Exchange Commission, the company said in a statement today. Nasdaq changed the reason for its halt from news pending to a request for added information.
China MediaExpress is one of about 370 Chinese companies that obtained U.S. listings since 2004 without the rigors of initial public offerings. C.V. Starr & Co., the investment company owned by former American International Group Inc. Chief Executive Officer Hank Greenberg, and New York-based hedge fund D.E. Shaw & Co. were among its top 10 holders in the last three months, data compiled by Bloomberg show.
“It had convinced a lot of investors that it was a real company because it had Deloitte as an auditor,” said New York- based Sahm Adrangi of Kerrisdale Capital LLC, which bet the shares would decline via short sales. “It’s just really been viewed as a key stock among both the longs and the shorts in terms of whether all the companies that have been accused of fraud are really frauds.”
Deloitte said in its resignation letter from March 11 that it was “no longer able to rely on the representations of management” and it recommended “certain issues encountered during the audit be addressed by an independent investigation,” according to the statement from China MediaExpress. The auditor also said these issues may adversely impact the company’s historical results, which may not be reliable.
China MediaExpress began trading in the U.S. following a 2009 takeover of TM Entertainment & Media Inc., a so-called blank check company with no operations of its own. In a reverse merger, a closely held company buys a publicly traded shell and retains the U.S. listing.
“Apparently, it’s a fraud,” said Uzi Zimmerman, a managing member of Ventura Capital Management, a hedge fund in the Los Angeles area. “Looks like some smart, reputable firms got fooled.”
Paul Welsh, a spokesman for D.E. Shaw, didn’t return a telephone call during business hours. C.V. Starr spokesman Jake Sokol didn’t return a phone message and an e-mail.
The company last month denied allegations of misleading investors made in three analyst reports. The stock fell 33 percent on Feb. 3 after Muddy Waters Research, a short seller, said the company inflates sales and profit. Citron Research and Bronte Capital have also criticized China MediaExpress.
“We have every reason to believe that each of these ‘researchers’ is actually a short seller, and each stands to make money -- at the expense of our stockholders -- when they succeed in driving down the price of our stock,” according to a letter from Chief Executive Officer Zheng Cheng posted on the company’s website on Feb. 7.
Short selling, or selling borrowed shares with the hope of profiting when they fall, totaled 9 percent of China Media’s outstanding shares, down from a record 11 percent in February, according to Data Explorers, a New York-based research firm. That compares with 5.1 percent on Dec. 31.
The shares fell 4.3 percent to $11.87 on March 11 before trading was halted at 10:12 a.m. in New York on the Nasdaq at the company’s request.
“This isn’t surprising. We’ve stated several times that this is major fraud,” said Carson Block of Muddy Waters Research. “We were glad to see that Deloitte took the allegations seriously and performed its audit with an increased level of scrutiny.”
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