You have made a difference!

Fellow citizens:

Your support and engagement continues to make a difference!

To prevent an ongoing fraud on the American people, we put up a petition to Stop the Madness! In these two weeks, many of you have written to your elected congressmen and women. Some have even petitioned the SEC and the White House directly. We are starting to see the message resonate.

Just a couple of days ago, Bob Casey, Senator – PA, wrote to the SEC directly addressing this issue. I am posting the entirety of his letter here:

The Honorable Mary Jo White
Chair
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Dear Chair White:

Thank you for your September 11, 2014 reply to my letter on Chinese companies that list on U.S. stock exchanges using Variable Interest Entity (V.I.E.) structures. I appreciate learning more about the S.E.C.’s efforts to limit the risks posed by these structures, and I am glad that these efforts have resulted in improved disclosures by some China-based firms.

As you know, this week the Chinese e-commerce company Alibaba is expected to list on the New York Stock Exchange in an initial public offering (IPO) that could be the largest in U.S. history. Alibaba will join more than 200 other Chinese V.I.E.s listed on major American exchanges. Given the scale of this trend, I remain concerned about the dangers that these structures pose. I am specifically concerned that improved disclosures alone may be insufficient to address these risks.

In your letter, you cite an illustrative example of an earlier trend of Chinese companies listing on U.S. exchanges using opaque “reverse merger” structures. As you note, the S.E.C. took valuable measures to study the risks posed by reverse mergers and improve disclosures by companies that used these structures. However, despite these enhanced disclosures, reverse mergers continued to provide fertile ground for fraud and abuse. An investigation found that American investors lost $18 billion in reverse-merger companies between 2001 and 2011.

These significant losses reflect the dangers posed when opaque corporate structures combine with fraudulent accounting practices. Like the reverse merger structure, the V.I.E. structure is, by design, an opaque regulatory workaround. Paul Gillis, an expert on Chinese accounting practices at Peking University, has written that V.I.E.s are “trying to tell Chinese regulators that the business is owned by Chinese and [tell] foreign investors that it is owned by foreigners.” The nature of this structure puts Americans’ investment in V.I.E.s at risk. Alibaba’s own S.E.C. Form F-1 filing notes that if Chinese regulators deem their V.I.E.s to be in non-compliance with Chinese law, the company could be “forced to relinquish our interest” in those V.I.E.s.

This risk is compounded by accounting irregularities remain all too common at Chinese firms. For example, I was troubled to learn from your letter that the Public Company Accounting Oversight Board (PCAOB) continues to face difficulties in getting access to Chinese companies’ audit work papers.

The risks posed by V.I.E.s are therefore similar to those posed by reverse mergers. A June 2014 report by the U.S.-China Economic and Security Review Commission found that American investors face “major risks from the complexity and purpose of the V.I.E. structure.” The Commission, which was created by Congress to study the national security implications of our economic relationship with China, goes on to suggest that if the V.I.E. system collapses – for example, if Chinese shareholders choose not to honor V.I.E. agreements – the consequences could match or exceed the $18 billion lost as a result of reverse mergers.

In order to prevent a repeat of these losses, I believe improving disclosures should be one part of a broader preventative strategy to control the risks posed by V.I.E.s. I understand that following the discovery of fraud by companies using reverse merger structures, the S.E.C.’s Cross-Border Working Group identified reverse mergers as posing a significant risk, and the agency eventually brought charges against several Chinese firms’ executives and their advisors. I would therefore urge the S.E.C.’s Cross-Border Working Group to consider making a similar determination about the risks posed by V.I.E. structures.

Given the large number of Chinese companies listed on American exchanges, including over 200 using V.I.E.s, I also ask that you provide me with detailed information about whether the S.E.C., particularly the Division of Enforcement, has enough resources and personnel to adequately pursue securities law violations by Chinese companies. Specifically, I would like to know if the S.E.C. is actively engaged in investigative work on the ground in China.

Finally, I would appreciate information about the resources and personnel the S.E.C. is dedicating to investigating the role of brokers, accountants and consultants who facilitate V.I.E. listings by Chinese firms. As you know, these third parties played a leading role in the dramatic growth of reverse merger listings by fraudulent companies based in China. It is essential that as we evaluate the risks posed by V.I.E.s, we monitor the activities of external advisors to Chinese firms.

I appreciate the S.E.C.’s continued attention to this problem and I look forward to continuing to work together to ensure American investors are adequately protected from these risks.

Sincerely,

Robert P. Casey, Jr.
United States Senator

Let us continue to shed the spotlight and ensure we see concrete action out of this. Please take a moment, support the petition and spread the message to your friends and family. This is for us- all of us.

thank you

CitizennP