China MediaExpress Accused by SEC of False Financials

China MediaExpress Holdings Inc., which obtained a U.S. stock listing without an initial public offering by buying a listed company, was sued by U.S. regulators for allegedly falsifying financial statements.

The Fuzhou, China-based company maintained forged bank statements that misrepresented its cash balances, enabling it to attract investors and raise money from stock sales, the Securities and Exchange Commission said in a complaint filed today in federal court in Washington.

CME is among almost 50 companies whose securities were deregistered by the SEC and 40 that were sued for fraud as part of an agency investigation into non-U.S. based firms. Many of them, like CME, entered U.S. capital markets through reverse mergers, in which a closely held firm buys a shell company already public on an exchange, allowing it to list shares without the scrutiny of a public offering.

“From its inception as a public company, China MediaExpress Holdings Inc. -- led by its chairman and chief executive officer Zheng Cheng -- massively overstated its cash balances in filings with the commission and press releases issued to the investing public,” the SEC said in the complaint.

Muddy Waters

CME, a supplier of television advertising services on buses in China, 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 said in a February 2011 report that the company was manipulating its financial statements.

“We’re glad to see the SEC moving aggressively against another fraudster, and providing additional details that include Chairman Zheng’s attempt to bribe a forensic accountant,” Block said in an e-mailed statement.

The SEC, seeking to bar Cheng from serving as an officer or director of any U.S. publicly traded company, said he offered an accountant looking into financial irregularities in the company a $1.5 million bribe to “assist with the investigation.” The accountant declined the offer, the agency said.

The SEC also said CME misrepresented its dealings with PepsiCo Inc. and Apple Inc., falsely claiming a direct advertising relationship with PepsiCo and falsely asserting it had a contract with an Apple distributor in China to advertise the company’s products.

Arbitration Panel

A Hong Kong arbitration panel in December ruled CME a fraudulent enterprise, awarding Maurice “Hank” Greenberg’s Starr International Co., an investor, as much as $77 million in damages.

Starr sued CME and its auditor, Deloitte Touche Tohmatsu in federal court in Delaware in 2011, claiming that it was fraudulently induced to invest. On May 21, Starr International won the case against CME didn’t the company didn’t defend itself. Deloitte Touche Tohmatsu is awaiting a ruling on its bid to have the case dismissed, arguing Starr’s claims are “hopelessly contrived.”

Alison Preece, a spokeswoman for Starr’s law firm, Boies Schiller & Flexner LLP, declined to comment on the SEC complaint. An e-mail to CME’s investor relations office seeking comment was returned as undelivered.

Delisted Shares

The Nasdaq stock market delisted CME’s shares in May 2011 for failing to timely file financial reports and the SEC deregistered the company’s securities in August for a similar reporting offense.

CME became a publicly traded company in October 2009 via a reverse merger with TM Entertainment Media Inc., a Delaware corporation, according to the SEC.

On Oct. 15, the day it went public, CME’s stock closed at $7.59 per share. On Nov. 9, 2010, the day the company falsely reported a cash balance of $170 million, the stock closed at $20.18 per share, according to the complaint.

The SEC action seeks disgorgement off gains from stock sales and other transactions, as well as unspecified civil penalties.

The case is Securities and Exchange Commission v. China MediaExpress Holdings Inc., 13-cv-00927, U.S. District Court, District of Columbia (Washington).

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