Starr International Co. was first introduced to China MediaExpress Holdings Inc. (CCME) by Deloitte Touche Tohmatsu, according to a new filing in a lawsuit in which Starr says it was misled into investing in the company.
The amended complaint also says that Starr, run by former American International Group Inc. (AIG) Chairman Maurice “Hank” Greenberg, hired a Deloitte affiliate to conduct financial due diligence on China MediaExpress before Starr began investing more than $53 million. The July 5 submission by Starr Investments Cayman II Inc., a unit of Starr International, suggests Deloitte helped pave the way for the initial investment of $30 million in the company, whose shares have lost 89 percent of their value this year.
Starr’s March 18 lawsuit, filed in U.S. federal court in Delaware, names Hong Kong-based China MediaExpress, a provider of advertising on buses in China, and Deloitte, its former auditor, as defendants. The company misrepresented its business and finances and Deloitte was negligent, according to the suit.
Dozens of Chinese companies that trade in the U.S. have disclosed financial irregularities or auditor resignations this year, raising concern that there may be widespread fraud among such companies and systematic flaws in their auditing. U.S.- listed Chinese companies have had $3.7 billion wiped off their value amid fraud allegations made by short-sellers, including Carson Block’s Muddy Waters LLC, which wrote about China MediaExpress in February.
Zheng Zhuofeng, financial controller of China MediaExpress, denied that Deloitte had a role in introducing Starr to the company, when contacted by Bloomberg News. Two telephone calls to Deloitte’s Shanghai and Hong Kong offices during regular business hours weren’t immediately returned.
Deloitte Touche, the Hong Kong member firm of the global accounting and consulting company Deloitte Touche Tohmatsu Ltd., resigned as China MediaExpress’s auditor in March. Deloitte said it had “lost confidence” in the commitment of the company’s board and audit committee to “good governance and reliable financial reporting,” China MediaExpress disclosed on March 29. Deloitte had raised audit issues including concerns over possible undisclosed bank accounts and bank loans and the validity of certain customers, according to the regulatory filing.
China MediaExpress announced on May 2 that its audit committee had retained law firm DLA Piper to assist in an investigation of concerns raised by Deloitte when it resigned. The company was delisted by the Nasdaq Stock Market in May.
A Deloitte Touche partner introduced Starr employee Dorothy Dong to China MediaExpress’s chief financial officer in July 2009, and suggested Starr discuss investing in the company, according to the amended complaint.
Starr later hired Deloitte & Touche Financial Advisory Services Ltd. to perform financial due diligence, the complaint says. The Deloitte affiliate “did not raise any ‘red flags’ during its due diligence and provided no indication that CCME’s profits or financial statements contained any material errors,” Starr says in the new filing. The day after its affiliate completed its work for Starr, China MediaExpress engaged Deloitte as its auditor, according to the complaint.
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