Aug
4
Update: The SEC Probes China Sky One Medical’s Incredible Numbers
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The Securities and Exchange Commission has issued subpoenas to China Sky One Medical and its auditors, MSPC, in conjunction with an inquiry it began last autumn exploring the company’s finances.
A copy of the subpoena to its auditors can be seen here. As would be expected, it seeks documents related to all aspects of its audit process for China Sky One and its subsidiaries. Michael Kayser, an MPSC partner in charge of the China Sky One audit, said that his firm completely fulfilled its obligations to the SEC request and has not heard back from them. He said that he was happy to comment since he was “Very angry at the unethical charges made by short-sellers about the work of [MSPC].” He added that he hoped that the SEC would act against short-sellers and their allies who make accusations in the media or on the Internet in the hopes of seeing the stock-price decline.
That said, the SEC inquiry also appears to have nothing to do with a restatement China Sky One made to change its accounting for derivative liabilities as they pertain to warrants.
China Sky One did not disclose the receipt of its own subpoena in its filings nor did it reference that its auditors had recieved one. To be fair, the company was not legally obligated to: The SEC has long held that a company’s management has the latitude to decide whether the initiation of an inquiry meets the materiality threshold. On the other hand, a company that has spent hours discussing its commitment to improving disclosure and governance–and which is in every sense a battleground stock between the accusations of short-sellers and investors supportive of management–might have taken this sort of opportunity to demonstrate its openess.
China Sky One and MSPC, at least as of late September, were under an inquiry which is fact-finding in nature; it is uncertain if the status has been upgraded to that of a formal investigation or if the matter was closed. [The SEC enforcement official in charge of the inquiry, Jungling Ma, is on vacation per a voice message on her phone. SEC spokesman John Heine declined to comment on the matter.]
As thefinancialinvestigator.com noted in this report, China Sky One has few peers in the universe of listed stocks for its ability to predictably grow revenues, improve margins and cash-flow and retain a near-pristine balance-sheet. Quarter after quarter, year after year, very little slows the double-digit percentage growth.There are no ways around it: The Harbin-based company has completely avoided debt-financing while manufacturing its own product and implementing international expansion plans–all from its growing cash generation abilities.
That this has been done selling an assortment of traditional Chinese medicines that can purportedly cure most anything–even the company’s staunchest defenders don’t really attempt to frame its lineup of sprays, powders and lotions as scientifically sound or medicinally valid–is also something of a miracle. For example, China Sky One’s most important product, the Sumei Slim Patch, would almost certainly be prohibited from sale in the U.S. under a host of FTC guidelines.
At the center of the fight is John Bird, a 60-year old resident of the foothills around Austin, Texas whose background includes decades as an investor in private businesses, horse-breeding and since the early 1990s, amateur sleuthing for his occasional (and usually profitable) forays into short-selling. Bird’s fight against CSKI was documented in the earlier FI.com investigation, but in brief, he has sued MSPC in New Jersey federal court claiming that it has materially abetted what he alleges is CSKI’s accounting fraud. This is not the first time these charges have been leveled against MSPC/Moore Stephens.
The SEC subpoena to MSPC, and thus the inquiry into China Sky One Medical, emerged during the discovery process in Bird’s suit.
Whether one sides with management or the skeptics, the issue of audit integrity with respect to publicly-traded Chinese companies is a building concern to the accounting industry’s rule-making body, the Public Company Accounting Oversight Board. Smaller auditors –many of whom are thinly-staffed and have a rich history of regulatory sanction–have built a lucrative business taking on Chinese small-cap companies as clients. Exactly how an accountancy with a few offices and perhaps a handful of native Chinese speakers can effectively manage Sarbanes-Oxley compliant audits for public companies in remote areas of China is something that the PCAOB has begun to look in to.
To get China Sky One’s comment, FI.com sent this E-mail to Crocker Coulson of CCG, the spokesman for the company–and many others–and one of the key figures in the growth and popularity of Chinese reverse-merger stocks.Asked to provide a response by 5 p.m. EST, neither Ms. Zhang nor China Sky One replied. [On a related note, Coulson has seemingly big plans for expanding his lucrative public-relations franchise beyond hosting conference calls and answering investor and reporter questions into the realm of money-management.]
