The main purpose of Ruixing ’s internal investigation is not to give an explanation to the public, nor to prove himself innocent, but to let the board of directors grasp the real situation and prepare for various future lawsuits.
Editor’s note: This article is from “Finance” .
Reporter: Yu Le Lu Ling Ma Lin
Edit: Mark
Rui Xing (NASDAQ: LK) financial fraud scandals have continued to ferment since April 2, and the current public focus is: who should take responsibility in addition to COO Liu Jian, Chairman Lu Zhengyao and CEO Qian Zhiya Off-line?
On April 5, Ruixing issued an apology letter, stating that the senior executives and employees involved have been suspended for investigation, and the company will not tolerate those responsible. The company’s board of directors has entrusted special committees and third-party organizations to conduct a comprehensive and thorough investigation, and disclose the investigation results to the public as soon as possible and take all remedial measures.
The reporter from Caijing contacted the above organizations for the first time, and said that the investigation is still in progress, and it is inconvenient to speak.
General public concern: Can the special committee formed by the board of directors of Ruixing and the third-party organizations entrusted by the committee really give objective and impartial investigation results?
Is the special committee “independent”
In the announcement issued on April 2, Ruixing Coffee stated that the company ’s financial vulnerabilities were discovered during the audit of the annual report, and Ernst & Young accounting firm responsible for the audit has also confirmed: In the audit of Ruixing 2019 During the financial report, it was found that there were false transactions from the second quarter to the fourth quarter.
After receiving the Ernst & Young report, Ruixing formed a special committee to investigate the fraud. This special committee is composed of three independent directors, chaired by Sean Shao, and the other two are Pu Tianruo and Wai Yuen Chong. In addition, the Commission also hired Kirkland & Ellis law firm in the United States as an independent external legal advisor and FTI Consulting (FTI Consulting) as an independent forensic accounting expert.
According to Rui Xing’s announcement, the special committee discovered the fictitious transaction of COO Liu Jian and others in the first phase of the investigation, and recommended that the board of directors suspend these people. Ruixing’s board of directors accepted the proposal and then announced it on April 2.
A lawyer familiar with the business of US stocks told the Caijing reporter that in the United States, the situation of the company ’s board of directors will be very embarrassing in a situation like Ruixing. The board of directors has both large shareholders and small shareholders. When the interests of the large shareholders and the small shareholders are inconsistent, can the board of directorsActing fairly on behalf of all shareholders will be marked with a question mark.
To solve this problem, the board of directors will temporarily set up a special committee. The special committee shall be composed of two or more independent directors, most of whom are senior legal and accounting experts with certain prestige, and shall not be interested in the matters involved. The Special Committee has the authority to independently assess, investigate, and analyze facts.
For companies listed in the United States, due to tax considerations, domestic companies in the United States are usually registered in Nevada and Delaware, and Chinese companies are usually registered in the Cayman Islands, Bermuda, and the Virgin Islands. In the case of listed companies registered in Nevada, the law requires mandatory establishment of a special committee of the board of directors to deal with the relevant events when the above-mentioned events affecting independent judgment occur; listed companies registered in Cayman and other places have no mandatory provisions in the law, but listed companies are happening In similar situations, there will also be special committees to deal with. Ruixing’s registered place is in the Cayman Islands.
“When minority shareholders and the company hold their own words, minority shareholders will believe in the findings of the special committee, and the court will use the findings of the special committee as the basis for the judgment when handling class actions.” The above lawyer told Caijing “reporter.
Among the three independent directors who formed the special committee of Ruixing, Shao Xiaoheng has served as an independent director from the beginning of Ruixing ’s listing. He has previously served as an independent director in many Chinese stock companies such as Jumei Youpin and Lanting Jishi. And the chairman of the audit committee. In the short report to Ruixing, Hunshui Company specifically pointed out that out of the 18 Chinese stock companies holding Shao Xiaoheng ’s position, four were accused of fraud and eight were close to delisting. “Almost all companies involved in Shao Xiaoheng Public investors suffered huge losses. “The report said.
Fan Yiqin, a partner of the Dorsey & Whitney law firm, told reporters from Caijing that the resumes of serving as independent directors in these companies do not mean that these independent directors must be responsible for the frauds of these companies. . “However, the SEC (United States Securities and Exchange Commission) can pursue the administrative liability of securities fraudsters in accordance with Article 17a of the US Securities Act. One of them includes prohibiting the defendant from continuing to serve as a director or executive of a listed company in the future.” She said .
Pu Tianruo and Zhuang Weiyuan are both independent directors who were just appointed on March 27, 2020. Both of them also served as members of the audit committee. Liu Erhai, a non-independent director who previously served as a member of the audit committee, also resigned. According to the US Securities Exchange Act of 1934, one year after the company goes public, the audit committee must be entirely independent directors.
Pu Tianruo also serves as an independent director and member of the audit committee of several listed companies. He and Shao Xiaoheng worked in another Chinese stock company, UT Starcom in 2012, Pu Tianruo was the chief financial officer, Shao Xiaoheng was the independent director and chairman of the audit committee.
Zhuang Weiyuan is currently in charge of supply chain management at Chia Tai Group.Also served as the senior vice president of supply chain in China for Starbucks Coffee, a competitor of Ruixing Coffee.
The two external consultants of the committee, Kaiyi and FTI, are the top institutions in the industry: Kaiyi is the law firm with the highest total income in the United States, and FTI (NYSE: FCN) is one of the largest financial consulting companies in the world. One. Both headquarters are in the United States, and both have offices in Beijing, Shanghai, and Hong Kong.
FTI confirmed to Caijing reporter that the agency is participating in the investigation of Ruixing, but said it could not disclose more details.
Ruixing is listed in the United States, and the regulatory agencies and investors it faces are all in the United States. An industry person familiar with Kaiyi and FTI told the Caijing reporter that Ruixing ’s choice of these two institutions may be related to their high reputation and reputation in the United States, and the two institutions have a good relationship, often Cooperation.
True investigation or walk through the scene
According to the Sarbanes-Oxley Act of 2002 issued by the United States, the company ’s internal audit committee is established by the board of directors and is responsible for overseeing the company ’s accounting and financial reporting processes and auditing financial reports. The members of the audit committee should be members of the board of directors and must It is independent (consultant fees are not acceptable and cannot be related to the company). At the same time, according to the bill, the company’s audit committee has the power to introduce independent consultants when necessary, which is the current measures taken by Ruixing’s board of directors.
Attorney Fan Yiqin said that when a listed company misconducts such as misleading operational or financial data disclosure may cause the US Department of Justice or the Securities and Exchange Commission to investigate it, the board of directors of the listed company established an independent investigation It is very necessary for the committee to investigate on its own. This independent investigation committee needs to be accountable to the company’s board of directors and all shareholders.
“The establishment of an independent investigation committee to investigate the abnormal financial data is not only to show the public that its listed companies are facing squarely and not evading the problem, but also to consider that it may need to respond to investigations by various regulatory agencies in the future and to respond to shareholder class actions. The first step in engaging an external US law firm is to ensure that the communications and work results during the investigation are protected by applicable confidential privileges. “
Fan Yiqin believes that in addition to verifying financial data, the independent investigation committee generally also appoints legal advisers to analyze whether listed companies and their directors and senior executives have indeed triggered illegal activities, and should take corrective actions to minimize any illegal activities Action plans for potential liability of listed companies. For example, analyze whether each of the directors and executives involved has deliberately violated the law, because this involves the question of whether “director and executive liability insurance” can settle claims.
Shenzhen Capital Chairman Liu Tiezheng has extensive practical experience in US stocks. He told Caijing reporters that although the directors and executives of Ruixing Coffee may face huge claims and fines, considering the characteristics and complexity of the US judicial system Compliance system, most listed companies in the US stock market will buy directors and executives liability insuranceMarry civil economic compensation liability and litigation lawyer fees of listed companies.
Ping An of China responded on April 3 that it had received a claim application from Ruixing’s directors for insurance, which is being processed. In addition to Ping An, a number of insurance companies are Ruixing’s directors and underwriters.
However, directors ’liability insurance usually only compensates directors and executives for losses caused to the company by“ improper ”behavior, and illegal or subjective fraud is not included in“ improper ”behavior. Therefore, the key to whether directors’ liability insurance can settle claims lies in the determination of the behavior of directors and executives.
“If there is any deception, the insurance company will not be alone,” Fan Yiqin said. “Ruixing definitely needs to make a pre-judgment on the future claims results through self-examination.”
Fan Yiqin also said that the members of the special committee have no direct interest in the company, and the decisions they make are also based on the findings of external legal advisers and accountants, so the credibility of the committee is guaranteed.
According to Liu Tiezheng, the special committee generally does not investigate by itself, but entrusts third-party law firms, accountants and consulting companies to investigate, and they also have to bear legal responsibility for their respective reports.
“The findings of the Special Committee are generally more true. But the treatment measures are not necessarily to meet the needs of all shareholders, because the goals of shareholders cannot be exactly the same.” Liu Tiezheng said.
However, Qin Xiaodong, managing partner of Malone Bailey LLP, is not optimistic about the prospects of the impartial investigation conclusion of the special committee. Qin Xiaodong has repeatedly discovered financial fraud during the audit of clients of China Prospective Stock. He told reporters from Caijing: “From my experience, the results of such third-party investigations are often irrelevant. These institutions are more In this case, it will choose to avoid the heavy ones, not to falsify, nor to touch all the truth. “
Qin Xiaodong pointed out that from the past cases, although external institutions may not cooperate with the company to make frauds, they rarely investigate substantive problems. Unlike the accounting firm that is responsible for the audit of financial reports, these external agencies that conduct investigations do not need to bear legal responsibility for the report, and the content of the report is not the information that the listed company should disclose. “This is just a consulting project, and there will be a lot of exemptions in the report,” Qin Xiaodong said. “I haven’t heard of any organization that has been punished by the regulatory authority for this kind of investigation report.”
Although the truth of Ruixing ’s fraud scandal has yet to be revealed, the market has severely punished the parties. On April 6, the Hurun Research Institute issued a report saying that due to the plunge of Ruixing ’s stock price in the past two trading days, the wealth of Ruixing ’s chairman Lu Zhengyao and CEO Qian Zhiya has fallen sharply, and both have fallen below the list of the rich. The “starting price” ($ 1 billion).
In the “Global Rich List 2020” released on February 26, the Lu Zhengyao family and Qian Zhiya also ranked 781 and 1692 with a net worth of US $ 3.4 billion and US $ 1.7 billion, respectively.on. In just over a month, their wealth has shrunk by at least 70% and 40%.
If the storm of financial fraud causes the stock price to continue to decline, the wealth of the two will shrink. In addition, the two of them and Ruixing will face the risk of further compensation and punishment. Many law firms in the United States have solicited investors to initiate class actions against Ruixing. The China Securities Regulatory Commission also issued a statement condemning Ruixing’s fraud. Both regulatory and legal risks are accumulating.