Don’t see the low barrier to going public in the US
I think it is a market where you can drill holes
You will find out when you actually enter the US stock market
American "leeks" are not so well cut
The compensation for "leeks" may be much higher than the income from cutting "leeks"
Li Ruoshan: "Streaking" and "fighting dad" in the US
"China News Weekly" reporter / He Bin
Published in the 955th issue of China News Weekly on 2020.7.13
The interview with Li Ruoshan, the academic director of the Master of Accounting Professional Program at the School of Management of Fudan University, happened on the evening of July 5th, at the extraordinary shareholders' meeting held in the afternoon of Ruixing Coffee, and proposed the removal of four directors and the addition of two independent directors. It wasn't until the evening that unofficial news came out one after another.
Speaking of independent director Shao Xiaoheng and two external directors leaving Ruixing's board of directors, the future internal investigation may not be carried out, Li Ruoshan asked back, "For Ruixing, do you think the internal investigation is meaningful?"
In his view, the biggest problem with internal investigations is the lack of independence. A group of stakeholders spend money on so-called professional organizations to carry out internal investigations, the purpose of which may simply be to clarify themselves.
As the first audit doctor in my country, Li Ruoshan used two words for Ruixing's vigorous financial fraud-"error" and "shame". More importantly, because of the Ruixing incident, the overall image of China Prospective Stocks has been greatly affected. However, in his view, the return of China Prospective Stock is not necessarily a bad thing. Through the Ruixing Coffee incident, we have rectified and rectified today's enterprises, cultivated them well, and went out after 5 to 10 years.
"The supervisory authorities of China and the United States are doing independent investigations"
China News Weekly: On July 1, Ruixing released an internal investigation report, what do you think of the investigation results?
Li Ruoshan: I think that internal investigation is a ridiculous thing. If a family has a big scandal that deceives most people outside, then this family organizes a survey and comes up with a result, would you believe it?
The biggest problem with internal investigations is the lack of independence. The people involved in the survey will definitely clear their responsibilities, but where are you when there is a problem? Are independent directors and outside directors not liable? Everyone is a stakeholder. Finally, an internal investigation is made and a result is used as a basis for punishment. Will the SEC accept all of it? Even if the internal investigation is to hire an independent third-party organization to do it, it will still stand in the position of the funder.
Therefore, whether it is legal, professional, or independent, internal investigation is a ridiculous thing, and the reason why such a procedure is needed is to clear itself. No matter the Securities Regulatory Commission or the court, any securities punishment agency will at most only use internal investigations as a reference, but it will never be used.
China News Weekly: At present, the SEC has not launched an investigation, what kind of investigation procedure will it be?
Li Ruoshan: Generally speaking, the American Public Company Accounting Oversight Board (PCAOB), a subsidiary of the SEC, officially filed a case. This is a special committee composed of people from accounting firms and law firms. They will officially file a case to investigate the accounting fraud process. After the investigation, it will take a long hearing process, even 1-3 years.
According to the Sarbanes-Oxley Act, specific supervisors, from the CFO to the chairman of the board, will face severe penalties if they are insiders. Prior to this, the relevant directors of World Communications and Enron were sentenced to 22 to 25 years in prison. In addition, companies and individuals will face huge fines, including compensation for shareholder losses.
In the United States, there are securities trading laws and Sarbanes-Oxley Acts. According to these laws, it is not only limited to financial personnel, but also the actual controllers of companies. If they know or participate, they will also be subject to criminal penalties. This will be a complicated and long process.
China News Weekly: How does the Sarbanes-Oxley Act solve such problems as Ruixing?
Li Ruoshan: This involves the legislative background of the Sarbanes-Oxley Act. After the Enron company broke the fraud scandal, once it entered the legal proceedings, both the chairman and the general manager, on the ground of ignorance, dumped the responsibility on their subordinates.
Since then, the United States has enacted the Sarbanes-Oxley Act, which stipulates that both the chairman, the president, and the chief financial officer are responsible for establishing a sound internal control system. If this internal control system is not established, the chairman, president and chief financial officer will assume legal responsibility.
Under a perfect internal control system, the company's senior management requires regular communication with the audit committee. For the evaluation and construction of internal control, there must be a special agency to appraise the internal control audit report.
Under the Securities Law and the Company Law, the Sarbanes-Oxley Act will have specific provisions. If you know that your subordinates have financial fraud but do not pay attention, you will commit a crime of dereliction of duty, and many regulations can be applied.
China News Weekly: The China Securities Regulatory Commission, the Ministry of Finance and the General Administration of Market Supervision are all stationed in Ruixing to conduct on-site investigations. Why is there such a strict investigation?
Li Ruoshan: Ruixing is a US listed company, but through the VIE model, the company's operations are within China. Such listed companies have committed financial fraud and deceived investors in the United States. Of course, the SEC must supervise it and punish it in accordance with the Sarbanes-Oxley Act.
Similarly, it also defrauded Chinese investors and Chinese creditors, and may also commit fraud. The China Securities Regulatory Commission can punish it for investigation, filing, and punishment in accordance with China’s securities laws and China’s company laws.
In fact, the supervisory authorities of China and the United States are doing independent investigations, and there is no question of who cooperates with whom and who coordinates whom. This is a matter of sovereignty.
China News Weekly: Does the new securities law raise the issue of long-arm jurisdiction, is it applicable to Ruixing?
Li Ruoshan: The new securities law was formally implemented in March this year, and Ruixing’s fraud was as early as April last year. According to the law’s principle of non-retroactivity, the issue of long-arm jurisdiction may not necessarily apply. However, in the face of these problems, it is not necessary to use the securities law, but also the company law or other laws.
"The biggest uncertainty now is the accountability of management and shareholders"
China News Weekly: At present, some investors have started to file lawsuits to claim compensation from Ruixing Company. How can compensation be initiated?
Li Ruoshan: The loss of investors is obvious, the stock price has dropped from the highest of 51 dollars to 1.38 dollars now. Falling more than 95%, the loss was heavy. At present, many investors are preparing to sue Ruixing Coffee through the law of class actions in the US Securities Law to demand compensation for losses, and they are still looking for the chief plaintiff as the basis for the case. Now let's make a rough calculation. According to the current market value of Ruixing, so many investors and so many investment losses, how to compensate is a complicated problem.
If the US court judges the major shareholders to compensate and the major shareholders are unable to pay, the US court usually uses the "deep pocket theory", which is to find all intermediaries related to the case, including investment banks, securities firms, lawyers and accountants, and find those Units with the ability to pay compensation will do everything possible to find defects and problems in their work, and deduct joint liability from this. Both Enron and WorldCom are compensated in this way. It is estimated that Ruixing Coffee is no exception.
In addition, there is a set of treatment methods in the United States, that is, the Sarbanes-Oxley Act, which forces companies to establish a sound internal control system to prevent future problems.
China News Weekly: For now, Ruixing is inevitable to delist in the United States. If it returns to China, is it still possible to maintain a healthy development and even re-list on A shares or Hong Kong stocks?
Li Ruoshan: This probability is equal to 0, impossible. Although there are more than 30,000 employees, it is important to secure employment, but it will not accommodate the illegal business behavior. Even if the company's top management has been replaced, it is unlikely to maintain the original company's organizational structure unless it is acquired. The best result of this enterprise is to be acquired. But I guess it is basically impossible to maintain the current model, brand, structure, organization, and now Ruixing has no assets, and even the coffee machine has been pledged.
Therefore, the biggest uncertainty now is the accountability of the management and shareholders, to what level, and how much responsibility, who is the mastermind, who is the manipulator, who goes to jail, who pays the money? These will not be known until the investigation is over.
China News Weekly: In this Ruixing Coffee incident, Chinese regulators repeatedly mentioned cross-border supervision issues. What impact will this have on the prospective stocks in the future?
Li Ruoshan: For the US stock market, we should not think of it as an opportunity as soon as they see the low threshold for their listing, or think it is a market that can be exploited. When you actually enter the US stock market, you will find that the US "Leek" is not so easy to cut, and the money to pay for "leeks" may be much higher than the income from cutting "leeks".
Therefore, the US Securities Regulatory Commission attaches great importance to the reputation and strength of sponsored companies when they are listed, such as UBS, Morgan, and the Big Four accounting firms. In addition to the quality of their work, the ability to compensate is also leveraged. Therefore, listing in the United States must require two principles: "streaking" and "fighting dad." The former requires information disclosure to be true and complete, and the latter requires intermediaries to have assurance capabilities.
Of course, good companies are still popular in the United States, but now that everyone is passing by in a hurry, the fish and dragons are mixed, which is not conducive to shaping a good image of Chinese companies.
Now, the return of Chinese stocks has basically become a trend. Because China is in the process of development, under the conditions of market economy, it is difficult to produce a mature enterprise with perfect internal control structure. So if you want to go public in the US market, you will definitely encounter all kinds of problems. I don't think it's necessarily a bad thing to come back. Through the Ruixing Coffee Incident, we will rectify and reorganize today's enterprises, cultivate them well, and go out after 5 to 10 years.
"China News Weekly" No. 25, 2020
Statement: The publication of the "China News Weekly" manuscript is subject to written authorization