The secrets of China Medical Technologies are beginning to surface and they confirm what many openly suspect: The framework of its corporate control has long since collapsed and management has disappeared.
According to documents obtained by The Financial Investigator, China Medical’s auditor, PriceWaterhouseCoopers, resigned after failing to get responses from its management despite “repeated efforts to contact the company,” according to an E-mail from a PWC official reviewed by FI.com. Under Securities and Exchange Commission rules, this constitutes a material development that China Medical was obligated to disclose, but did not.
The rule violations are quickly piling up: A public company must have an auditor and there are no circumstances in which they can present an annual report without one. While China Medical did not have to have another auditor in place before beginning the next audit, they were required to disclose PWCs departure within four days in a 6-K filing to shareholders. Moreover, the filing would have had to disclose if PWC resigned because of disagreements with management.
As it stands, these are merely academic concerns since two additional E-mail threads obtained by FI.com indicate that PWC resigned on April 23.
Iain Ferguson Bruce, the former senior partner of KPMG’s Hong Kong office and the company’s last independent director, resigned on July 3 after spending what he describes as fruitless months trying to get in touch with management. His last contact with management was on January 5th and despite directly requesting his resignation letter be disclosed, it was not. Another Bruce letter, dated May 22nd and demanding a special meeting of the board of directors, was also ignored.
From the standpoint of being a publicly traded company, China Medical Technologies appears to no longer exist. Its management has not been physically seen or heard from this year, it hasn’t had an auditor in almost four months, its registrar and lawyers are unable to communicate with officers and its board has either quit or ceased oversight.
Then there are the bondholders, angry over their $400 million in loans to a company that defaulted without notice, despite a reported $206 million in cash on its last balance sheet. Though this ad in Monday’s Wall Street Journal shows that the liquidation of China Medical is continuing apace, what will remain for bondholders to sell off in the hopes of obtaining a material recovery is highly uncertain.
On a human level, what this means for William and Peter Deutsch, father-and-son wine importers, and AER Advisors, a husband-and-wife run investment advisory in New Hampshire, is equally unclear. Recall that the Deutsch’s, having never appeared in a financial filing before February, built what would become a $43 million stake in China through AER, whose primary foray into active ETF management ended ingloriously when the ETFs shut down as performance suffered, at least partially because they owned some notorious Chinese frauds. The stake appears to be a material amount of Peter Deutsch’s wealth.
Carol O’Leary, the president of AER, declined repeated attempts to discuss the issue with FI.com, but has not been shy in discussing her views with other China researchers and investors via E-mail and phone. Put broadly, she dismisses most of the concerns raised by short-sellers as intentional distortions and expressed confidence that the Sarbanes-Oxley Act and the SEC’s oversight of the company was adequate.
On Monday trading in China Medical shares is slated to start again, per the SEC’s two-week administrative halt.
Matters, however, are indeed clearer for investors: they own an equity claim to a company that will almost certainly be liquidated and which fails to meet even the most rudimentary framework for being publicly held.