NASHVILLE, TN – June 24, 2013 – On Friday the Securities and Exchange Commission (SEC) charged China-based China MediaExpress and its CEO Zheng Cheng with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.
China MediaExpress, a company that operates a television advertising network on inter-city and airport express buses in China, materially overstated its cash balances by more than 40,000 percent, according to the SEC complaint.
As highlighted in the SEC’s complaint, “China Media’s falsely reported increases in its cash balances allowed the Company to attract investors and raise money from stock sales.” As an example, in 2010, “a hedge fund paid China Media $53 million to purchase millions of shares of China Media’s preferred and common stock.”
China Media had gained access to U.S. investors through the reverse-merger process and had a market capitalization of more than $700 million before the fraud was uncovered. Public investors suffered major losses when the stock tumbled more than 90 percent in the weeks after the first fraud allegations. The stock has since been delisted from the U.S. stock exchange.
“Fraudsters get value by stealing cash and other assets from a business, the stock they own goes up in value as the company’s stock price climbs, or they receive bonuses and stock options for financial performance,” said Chris Schellhorn, CEO of Confirmation. In this case, in addition to seeing his net worth increase as the company’s stock skyrocketed, the SEC says that Cheng also manipulated the financial statements to earn stock bonuses “worth approximately $6 million.”
In March 2011, China Media’s external auditor resigned, citing suspicions concerning fraudulent bank confirmations and statements, and falsified confirmations of accounts receivables and payables. The company’s audit committee then hired a law firm and a second outside audit firm to investigate.
“Because one of the banks in this case had switched to responding to audit confirmations exclusively through Confirmation and no longer accepted mailed or faxed forms, the CEO could not misdirect the auditor’s confirmations,” said Dave Malone, vice president at Confirmation.
According to the SEC’s complaint, right before the fraud became public knowledge, Cheng offered a senior accountant working on the investigation a bribe of approximately $1.5 million to “assist with the investigation.”
“This is another example of a fraudster trying to hide their fraud by refusing to allow the use of Confirmation’s service,” said Brian Fox, founder and president of Confirmation. “Just like the frauds at PFG Best and the Shepherd Major Play Option Fund, which our service helped uncover, refusing to allow the auditors to confirm balances through Confirmation is always a red flag for fraud.”
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