China MediaExpress a Fraud, Hong Kong Arbitration Rules

China MediaExpress Holdings Inc., which obtained a U.S. stock listing without an initial public offering by buying a listed company, was a fraudulent enterprise, a Hong Kong arbitration panel ruled, awarding Starr International Co. as much as $77 million in damages.

Starr, a firm run by former American International Group Inc. Chief Executive Officer Maurice “Hank” Greenberg, sued China MediaExpress, or CME, and its auditor Deloitte Touche Tohmatsu in Delaware in 2011, claiming Starr was fradulently induced into investing in the Chinese company, whose shares have been delisted.

CME’s founding shareholders were ordered by the three-member panel to pay Starr the funds for not honoring an agreement to buy back its stake, according to its Dec. 19 ruling, which was submitted as evidence yesterday in Starr’s Delaware lawsuit. The panel rejected the Chinese company’s claims that its video advertisement display business was destroyed by short sellers.

“I think it’s a very major event in the larger landscape because with all the controversy involving Chinese reverse-merger companies, and their auditors, there’s been no finding of liability” until now, Lee Wolosky, a partner at Boies, Schiller & Flexner LLP in New York, who is representing Starr, said yesterday.

SEC Investigations

The U.S. Securities and Exchange Commission has deregistered the securities of almost 50 companies and filed fraud cases against more than 40 issuers and executives as part of its investigation into the non-U.S. based firms. Many of them entered U.S. capital markets through reverse mergers, in which a closely held firm buys a shell company already public on an exchange, allowing them to list shares without the scrutiny of a public offering.

Wolosky said the Hong Kong award should assist Starr with its lawsuit in Delaware against parties including Deloitte.

Wilfred Lee, a Deloitte spokesman in Hong Kong, didn’t immediately respond to a request for comment. Deloitte resigned as CME’s auditor in March 2011, saying it was no longer able to rely on representations of management.

An e-mail to CME’s investor relations department was returned as undelivered.

CME was among the Chinese companies accused by Carson Block’s Muddy Waters LLC of financial irregularities. CME shares plunged 93 percent in five months after Block’s February 2011 report accused the company of manipulating its financial statements.

Chinese Hollywood

CME had claimed in the arbitration proceedings that Starr’s investment was used in a deal intended to create the biggest television and film production center in southeast China, according to the panel’s ruling.

Zheng Cheng, CME’s founder and chairman, had compared it to a Chinese version of Hollywood, according to the ruling.

“Cheng was such an unreliable witness that no credence can be given to this explanation,” the panel said in the ruling.

The Hong Kong arbitration case is Between Starr Investments Cayman II Inc. and Zheng Cheng, Ou Wen Lin, Qingping Lin. HKIAC/A11098. Hong Kong International Arbitration Centre. The Delaware case is Starr Investments Cayman II Inc. v. China MediaExpress Holdings Inc. 11-233. U.S. District Court, District of Delaware (Wilmington).

Before it's here, it's on the Bloomberg Terminal.