{"id":5670,"date":"2011-02-23T04:00:24","date_gmt":"2011-02-23T10:00:24","guid":{"rendered":"http:\/\/www.sequenceinc.com\/fraudfiles\/?p=5670"},"modified":"2011-08-15T23:21:04","modified_gmt":"2011-08-16T04:21:04","slug":"update-on-fraud-allegations-at-china-mediaexpress-holdings","status":"publish","type":"post","link":"https:\/\/www.sequenceinc.com\/fraudfiles\/update-on-fraud-allegations-at-china-mediaexpress-holdings\/","title":{"rendered":"Update on Fraud Allegations at China MediaExpress Holdings"},"content":{"rendered":"

UPDATE: In March 2011, CFO Jacky Lam of China Media Express and the auditors (Deloitte) resigned<\/a>. Deloitte said they could no longer rely on the representations of management, and they suggested an investigation was in order. Ping Luo, the analyst from Global Hunter who gave CCME rave reviews resigned<\/a>. Maurice Greenberg’s Starr Investments sued CCME for fraudulently inducing it to invest $13.5 million<\/a>. The stock was delisted from the NASDAQ in May 2011<\/a>.<\/em><\/p>\n

Deloitte raised the following issues<\/a>: questionable authenticity of bank statements, supicioius bank confirmation procedures, existence of advertisers\/customers, undisclosed bank accounts and bank loans, financial filings with the State Administration of Industry and Commerce differing from information provided to auditors, questionable authenticity of tax filing documents, cash payments to employees, and double counting of buses. <\/em><\/p>\n

A couple of weeks ago I posted an article examining some of the allegations against China MediaExpress Holdings (NASDAQ:CCME) alleging that management was committing fraud on the investing public<\/a>. I also discussed the company’s response, as well as the response of writers who are supporters of CCME.<\/p>\n

The allegations that concerned me most were:<\/p>\n

a. Despite claiming to be the largest television advertising operator on inter-city and airport express buses in China, there is little information to be found on the internet about CCME.<\/p>\n

b. Profit growth from $2 million to $85 million doesn’t make sense.<\/p>\n

c. The company does not exist on the large scale which it claims.<\/p>\n

d. 2009 revenue was to the $95.9 million reported, rather it was $17 million.<\/p>\n

e. Significant discrepancies exist between reported number of buses under contract per the disclosures to investors and per the materials the company supplies to advertisers.<\/p>\n

f. The company is lying about an agreement between itself (via its website www.switow.com) and Apple or an Apple distributor.<\/p>\n

g. Media buyers who represent the claimed customers of CCME have never heard of the company.<\/p>\n

h. The claimed “exclusive license from the Chinese Ministry of Transport” is neither a license, nor with the Ministry of Transport.<\/p>\n

i. CCME claimed it won an award for a patent, but no such award was ever given to the company.<\/p>\n

j. Significant discrepancies exist in the revenue reported to the SEC (U.S.) versus the revenue reported to the Chinese government<\/p>\n

Supporters of China Media Express have come up with defenses or arguments in favor of the company, which include:<\/p>\n

k. The allegations are made by short sellers who stand to profit if the stock price goes down, so their allegations are immediately suspect.<\/p>\n

l. Starr International conducted due diligence before investing $30 million in CCME.<\/p>\n

m. Global Hunter Securities also conducted due diligence and channel checks.<\/p>\n

n. The financial statements are audited by Deloitte Touche Tohmatsu.<\/p>\n

o. A cash balance is difficult to falsify, especially when the financial statements are being audited.<\/p>\n

China Media Express also published responses to some of the allegations, and the arguments that might have some substance to them include:<\/p>\n

p. The critics are short sellers (same as k above).<\/p>\n

q. The financial statements are audited (same as n above).<\/p>\n

r. Numbers reported by critics are wrong.<\/p>\n

s. The company has the contracts they say they have.<\/p>\n

t. The number of buses under contracts looks lower than reality because some of the contracts are with subcontractors.<\/p>\n

u. CCME has a contract with an authorized Apple distributor, Eading Group.<\/p>\n

v. CCME has no competitors, which is why supposed competitors said they’d never heard of CCME.<\/p>\n

w.\u00a0 Revenue differences are related to differences in reporting rules between the U.S. and China.<\/p>\n

x. CCME has a “tongzhi” issued by the Transportation Television Audio Visual Center, a department under the Ministry of Transport.<\/p>\n

More recently Global Hunter Securities released another report about their due diligence on China Media Express<\/a>. They reported:<\/p>\n