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China MediaExpress Holdings, Inc. (NASDAQ: CCME) (“CME” or “Company”),China’s largest television advertising operator on inter-city and airport express buses, today announced that the Company’s registered independent accounting firm, Deloitte Touche Tohmatsu (“DTT”) has formally resigned its engagement by the Company as of March 11, 2011. Following the receipt of the DTT resignation letter, on March 13, 2011, the Company received notice of the resignation of Jacky Lam from his position as Chief Financial Officer and director of the Company, effective immediately. As a result, CME will delay its fourth quarter earnings release and will not file its Form 10-K for the fiscal year ended December 31, 2010 by March 16, 2011, its original due date.
What caused Deloitte to jump ship? The auditors said that they could no longer rely on the representations of management. Further, issues arose during the audit, and Deloitte recommended an independent forensic investigation. The prior years’ financial statements may be unreliable, according to Deloitte.
A resignation letter from a member of the Board of Directors indicated that there were irregularities with the company’s bank balance. I find this particularly interesting, since the supporters of CCME blasted me regarding this very issue. They claimed CCME had a large sum of money in the bank, and since that bank balance was “audited” it proved the company was legitimate. I responded with a lengthy article on the procedures used to audit cash and why those procedures don’t come close to proving that a company is legitimate.
And the story has continued to unfold. Less than a week later, it was reported that Ping Luo, the analyst who supposedly performed extensive due diligence on CCME, was no longer with Global Hunter Securities. According to her reports, all was well at China MediaExpress. It would appear she was mistaken.
At the same time, Starr Investments filed a lawsuit against CCME, Deloitte, Zheng Cheng (CEO), and Jacky Lam (CFO), stating:
This action for declaratory relief and damages arises out of CCME’s repeated and systematic violations of the securities laws and regulations and its fraudulent inducement of hundreds of millions of dollars of investments…
Specifically, CCME is accused of misrepresenting the nature and extent of its business, as well as the size of the bus advertising market, and failing to comply with Generally Accepted Accounting Principles (GAAP) and overstating the company’s financial position. Starr is claiming that they were induced to invest $30 million in China Media Express based on fraudulent financial statements and untrue representations by management.
Things are not looking good for CCME.
So it’s clear that my initial opinion of “where there’s smoke, there’s fire” was right on point. I didn’t need to do my own due diligence, or spend many hours analyzing the financial statements. There were too many red flags in plain sight. We still don’t know exactly which allegations against the company are true and which are false. The particulars really don’t matter. What matters is that CCME is a fraud, regardless of the details.
It would be easy to gloat about this one, but anyone with an ounce of brains could have seen the red flags of fraud a mile away. Some supporters of CCME are eating crow, but many are still holding out hope that the company will turn out to be legitimate. Don’t hold your breath.
(Yes, I’m a little late in writing this up. Too bad.)