Jul 01, 2020
Fraud From The Great Wall Hits Wall Street
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U.S. investors recently learned a hard lesson about Luckin Coffee, a strong rival to Starbucks in China. The company admitted that much of its 2019 sales had been fabricated. Luckin’s stock, which is listed on the Nasdaq, had peaked at an all-time high of $50 in January. Now, its shares have plummeted and U.S. banks stand to lose more than $100 million in loans.
How did Luckin get away with such phony accounting? Chinese stocks listed on U.S. financial markets are not required to fully disclose their financial information. Essentially, there are two sets of rules in America’s investment markets — one for Chinese firms and one for all other publicly traded companies. This means Chinese companies are continually shielded from the full oversight of U.S. financial regulators — setting up the possibility that investors could unwittingly fund fraudulent entities and bad actors.
The number of companies involved is troubling. The U.S.-China Economic and Security Review Commission (USCC) has identified 156 Chinese companies — including 11 state-owned-enterprises — listed on America’s three largest stock exchanges. And in December 2018, the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) warned investors that U.S. regulators face challenges when attempting to conduct oversight of companies whose operations are based in China and Hong Kong. (RELATED: The Fight To Reshore US Pharmaceuticals)
This has been an issue since at least 2013. At the time, Vice President Joe Biden helped the PCAOB sign an agreement allowing Chinese companies to remain on U.S. stock exchanges even though they weren’t in compliance with financial regulations. It was assumed that subsequent negotiations between Washington and Beijing would settle the details — and make Chinese entities less opaque.
Since signing the 2013 agreement, however, China has consistently failed to provide timely access to the documents that the PCAOB needs to carry out its oversight. And that means scores of Chinese companies have been listed on U.S. stock exchanges for as much as 20 years without adhering to U.S. securities laws.
The USCC has determined that some of these companies are state-owned, which means they could pose a potential national security risk. Realistically, though, each company also poses a risk to investors — since there’s no true accounting of their financials and other key information.
Listing these companies has certainly been good business for Beijing, though. The Chinese companies listed on America’s three largest stock exchanges have a combined market capitalization of $1.2 trillion.
The overall lack of oversight on these stocks conflicts with the requirements of the Sarbanes-Oxley Act. Yet audit firms in China will not release papers to the SEC or the PCAOB. And many of these Chinese companies provide support for the People’s Liberation Army or human rights violations conducted at Uighur concentration camps. Others have violated U.S. sanctions or have been placed on the Department of Commerce’s “entities list.” (RELATED: Trump Signs Bill Protecting Chinese Uighurs On Same Day John Bolton Claims He Gave Xi Approval On Detention Camps)
The Trump administration is clearly unhappy with the situation, however, and has established a committee to investigate fraudulently listed companies in U.S. stock markets. The committee is charged with making a finding within 60 days. It shouldn’t take long for the administration to determine that many of these Chinese companies should not be listed in U.S. stock markets, since they don’t comply with U.S. securities laws.
The president should instruct the SEC and PCAOB to immediately provide 30 days notice in order to end the agreement signed in 2013. And then, Chinese companies that don’t come into compliance with U.S. securities laws and SEC regulations within six months should be deregistered from U.S. exchanges and stripped from U.S. indexes and associated funds.
As the Trump administration looks to help the nation recover from the economic impacts of the COVID-19 pandemic, it will be important to clean house in America’s financial markets. There’s simply no reason to allow heavily subsidized competitors in China free rein in America’s stock exchanges. It’s time to tell Beijing that the rule of law matters, particularly when U.S. capital is at stake.
Michael Stumo is CEO of the Coalition for a Prosperous America (CPA). Follow him at @michael_stumo
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Mississippi mayor and wife indicted on federal fraud charges
A mayor in Mississippi and his wife were indicted on more than a dozen charges of wire fraud last week after raising money for a school district and allegedly using the funds for personal expenses.
Federal and state authorities announced the indictment of Moss Point Mayor Mario King and his wife, Natasha King, on Friday as the couple made their first court appearance. King, a Democrat, was elected to office in 2017 and still serves as the mayor.
The couple began soliciting money in 2018, according to the indictment, for a gala that “honors and supports organizations that are making a difference for the mental health community. Proceeds support the efforts of mental health in the City of Moss Point with a focus on the Moss Point School District, converting spaces into a therapeutic and innovative learning environment.”
After the gala, prosecutors say the couple used some of the money raised for personal purchases but never gave the residual funds to the school district as was planned.
The indictment says Natasha King used a business credit card to put a $2,000 down payment on a Cadillac. She allegedly later returned the car then deposited the refunded down payment to the couple's personal account.
The indictment also said the couple used money raised by the gala to pay off credit card debt to buy a dog. King put another down payment of $3,700 on a Volvo, with $3,000 of the money coming from funds raised from the gala, according to the indictment.
“We look forward to our day in court,” the mayor told journalists when asked for comment following their Friday court appearance.
"If convicted, the defendants face up to five years on the conspiracy charge and up to twenty years on each of the thirteen wire fraud charges. Each of the fourteen counts carries a maximum fine of $250,000," a Justice Department press release stated.
Moss Point aldermen said in light of the news that they can't force Mario King to resign from his position.
“There has been no indication that the mayor intends to resign as a result of the indictment, and the Board of Aldermen cannot force a resignation,” a statement from the aldermen said. “We understand that many citizens have expressed concerns over the Mayor staying in office due to the nature of the allegations, but we would like to reiterate ... ‘Every defendant is presumed innocent until proven guilty in a court of law.’”
John Mosley Jr., who lost the last mayoral election against Mario King, said the controversy is “sad” for the town of roughly 13,350 people.
“It’s a sad day for Moss Point. I feel for the family. I feel for the children. It’s just something I can’t put into words,” he said. “On the same token though, I’m glad that we uncovered something of possible criminal activity. Of course, we have to let process play out, but if it is true it is a sad day for Moss Point, but it could possibly be a good day.”News Mississippi Crime Mayor