Deloitte Loses Bid to Delay SEC Suit Over China DocumentsTom Schoenberg
Deloitte Touche Tohmatsu CPA Ltd. lost a bid to delay a lawsuit brought by the U.S. Securities and Exchange Commission seeking documents in an investigation of the auditor’s former client Longtop Financial Technologies Ltd.
U.S. District Judge Gladys Kessler in Washington today rejected Shanghai-based Deloitte’s argument that the case should be put on hold while an administrative judge considers a separate case the regulator brought against the China-based affiliates of the Big Four accounting firms.
“There is no significant burden placed on Deloitte by requiring it to litigate these two very different proceedings simultaneously,” Kessler said.
The decision may quicken the pace of litigation over the Chinese documents sought by the regulator more than 22 months ago.
The Deloitte case has been on hold since August when the U.S. sought a resolution from Chinese regulators. Chinese law bans the removal offshore of audit papers, and foreign regulators aren’t allowed to work inside the country.
Talks broke down, and the SEC moved to restart the case in December. The agency that month also brought an administrative action against D&T Shanghai, Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs, claiming they have refused to cooperate with accounting investigations into companies whose securities are publicly traded in the U.S.
The auditors said Chinese law prevents them from complying with the SEC’s demands, hindering U.S. efforts to probe allegations of fraud.
D&T Shanghai resigned as Longtop’s auditor after discovering improprieties during the year ended March 31, 2011, according to the SEC. The SEC issued a subpoena for documents it said may contain basic information necessary to determine whether there was a fraud, who was behind it and how it was conducted.
The New York Stock Exchange delisted Longtop’s American depositary shares in August 2011.
Deloitte lawyers Michael Warden and Miles Ruthberg didn’t immediately respond to e-mail messages seeking comment on the ruling.
Deloitte sought to keep the case on hold until at least a judge in the administrative action has a chance to rule on requests to dismiss it filed by the accounting firms.
Deloitte argued in court filings and at an April 11 hearing that lifting the stay would put the court into the middle of an international dispute between China and the U.S. government.
The action might undermine a resolution to a three-year impasse over whether auditors can share work documents with regulators investigating possible accounting fraud at companies selling securities in the U.S., Deloitte said.
Delaying the case is an effort by Deloitte “to kick the can down the road” and prevent investigators from learning “what led to this massive financial fraud” with $1 billion in losses to investors, including some in the U.S., David Mendel, an SEC lawyer told Kessler during the hearing.
The judge said today that the SEC demonstrated that the only way it can obtain the documents needed for its Longtop investigation is through the federal court suit. Waiting for resolution of the administrative case, which doesn’t involve the Longtop probe, might take more than a year.
“The SEC has a responsibility to complete this investigation and pursue these documents in a timely fashion in the venue available to it,” Kessler wrote.
The case is U.S. Securities and Exchange Commission v. Deloitte Touche Tohmatsu CPA Ltd., 11-mc-00512, U.S. District Court, District of Columbia (Washington).