Site Meter
« HK SFC fines broker for failing to tape calls | Main | Tribunal directs FSA on Market Abuse Case »
Friday
Sep092011

SEC Filed Enforcement Notice Against Deloitte Shanghai 

The SEC has released an enforcement action notice on 8 Sept 2011 (EST) against Deloitte Touche Tomatsu in Shanghai. Though this particular filing targets an accounting firm, it is especially intriguing how the SEC has reasoned in its order about its authority to enforce beyond US borders. Non-US hedge fund managers should be especially cautious in confirming whether their activities are being governed by US rules.

Deloitte Shanghai was auditing Longtop Financial Technologies until March 2011 this year, when Deloitte discovered flaws in Longtop’s accounting reports and later resigned as an auditor. That said, the SEC ruled that Deloitte was refusing to comply with a subpoena order, which required the company to disclose to the SEC Longtop’s past accounting reports. According to the SEC’s citation in court papers, these documents were of pivotal importance in the investigation of a financial fraud ongoing in Longtop; the relevant enforcement notice reflects the SEC’s interpretation that Deloitte’s refusal presents an impediment to the process of an investigation and hence the timely prosecution of a financial fraud which may endanger the interests of US investors. 

The court filing posted by the SEC revealed the views of Deloitte in refusing to comply with the subpoena. Some points of its argument are particularly outstanding. One is that a US subpoena for foreign accounting firms (Deloitte Shanghai is a Chinese entity) was necessarily restrained by section 106 of Sarbanes-Oxley Act, as amended by Dodd-Frank Act, which does not impose a direct requirement on such firms to produce audit reports upon issuance to the Commission. Secondly it also argued that relevant Chinese regulators would forbid it to submit such information to foreign regulators based on “national interests” grounds.

The SEC did not agree with the said arguments from Deloitte. Our readers should note the SEC’s view of the extent of US jurisdictional power. It said section 106 was merely assisting firms which had difficulty in responding to such a subpoena. It confirmed that the SEC has broad investigative authority which it would almost be impossible for firms to be excluded. It further interprets that the “Chinese national interest” ground claimed by Deloitte was vague at best. In fact, it noted that Deloitte’s refusal to respond to US subpoena may violate Chinese national interest or secrecy terms.

The whole argument was quite whimsically played out part D of the court filing, attached immediately below.

The Court filing can be found here.

The SEC summary of the Deloitte Touche Tohmatsu Shanghai case can be found here.

PrintView Printer Friendly Version

EmailEmail Article to Friend

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
All HTML will be escaped. Hyperlinks will be created for URLs automatically.