For some U.S. investors trying to hold Chinese companies to
account, Robert Seiden could be the last, best hope.
Shareholders lost billions of dollars when a wave of U.S.-traded
Chinese companies were tarnished by accounting and disclosure
concerns in recent years. But U.S. investors have largely been
stymied when pursuing Chinese companies in court. Many have simply
"gone dark," abandoning U.S. markets and ignoring U.S. court
judgments, and it is hard for investors to go after them in China's
semiclosed society.
Now, Mr. Seiden, a court-appointed receiver charged with leading
the pursuit of several Chinese companies on their shareholders'
behalf, may have found a way. He reached his first settlement last
week, for $3.7 million, with Shengtai Pharmaceutical Inc., which
had previously failed to comply with a court judgment. Mr. Seiden
said he is close to a settlement with a second company, as
well.
"We are getting justice and money back for U.S. investors who
were heretofore hopelessly being left in the dirt by these
companies," Mr. Seiden said.
Investing in Chinais hot again, and many investors in larger,
newer Chinese companies haven't encountered any problems like the
ones Mr. Seiden is trying to settle. But his efforts are a reminder
past disputes over Chinese companies still sting for many
investors.
"I'm 83 going on 84. I don't have much time left," said George
Vlahos, a retired Byfield, Mass., educator who lost several hundred
thousand dollars in Sino Clean Energy Inc., the company with which
Mr. Seiden hopes to settle soon.
Some experts on China said Mr. Seiden's approach may hold
promise. But others are skeptical, concerned that China-based
executives may resist cooperating with a foreign receiver. "I don't
see the magic bullet yet," said Edward J. Epstein, a Troutman
Sanders LLP lawyer in Shanghai.
Under the settlement finalized last week, Shengtai, which makes
starch and glucose products for use in pharmaceuticals, agreed to
pay $3.7 million to buy back the stake held by its major outside
shareholder, Pope Investments LLC, according to previous drafts of
the settlement agreement seen by The Wall Street Journal. Mr.
Seiden's office says the final settlement uses the same terms.
Shengtai was never accused of accounting fraud, but it had
ignored a 2014 Delaware Chancery Court judgment ordering it to open
its books to Pope, after Shengtai's chief executive withdrew a
going-private offer and Shengtai gave up its registration to trade
on U.S. exchanges. Pope didn't respond to requests for comment.
Liu Qingtai, Shengtai's chief executive, couldn't be reached for
comment, and Ren Baowen, Sino Clean's CEO, didn't respond to
requests for comment. An American attorney who represents Sino
Clean declined to comment. U.S. regulators haven't charged either
company or any of their officials with any wrongdoing.
More than 170 U.S.-traded Chinese companies have faced
accounting or disclosure questions since 2011. The Securities and
Exchange Commission has filed about 30 civil fraud cases and
reached a number of settlements, as have some shareholders who
filed class-action lawsuits.
But most settlements have been small. Many Chinese companies
ignored court judgments levied on them and simply stopped
communicating with the SEC and U.S. investors. The SEC has revoked
more than 120 Chinese companies' registrations to trade in the
U.S.; dozens more have surrendered their registrations
voluntarily.
Mr. Seiden entered the picture in 2013, when a Delaware judge
held Chinese network-equipment maker ZST Digital Networks Inc. in
contempt for ignoring an order to open its books to a U.S.
investor. The judge ordered ZST to pay the investor $32 million and
said a receiver should be named to help collect the judgment.
David Graff, a lawyer representing the investor, knew Mr. Seiden
from another case and asked him to apply. A Marine's son who grew
up in Brooklyn, N.Y., Mr. Seiden had been a prosecutor in former
Manhattan District Attorney Robert Morgenthau's office and later
founded his own investigation firm, Confidential Security &
Investigations.
He had worked in China, conducting corporate due diligence and
background checks, and as a monitor for the Port Authority of New
York and New Jersey sniffing out waste, fraud and abuse in the
building of the Freedom Tower on the former World Trade Center
site.
Mr. Seiden said his strategy is to capitalize on a structure
Chinese companies often use to get around their government's
restrictions on foreign investment. In a number of the cases under
Mr. Seiden's purview, the corporate entities that owned the
companies' China-based operating assets were actually owned by
subsidiaries located outside China, in areas like the British
Virgin Islands or Cayman Islands.
The 52-year-old receiver used his authority to work through
those regions' courts to gain control over the subsidiaries. With
Shengtai, the subsidiary, Shengtai Holding Inc., was based in New
Jersey. For Sino Clean, he seized Wiscon Holdings Ltd., a Hong Kong
subsidiary, court documents show.
That enabled him to go into China not as a foreign creditor who
could be brushed aside but as the assets' legal owner. "You've got
to go in standing in the shoes of the company," he said.
With Shengtai, Mr. Liu signed an agreement with Mr. Seiden last
November to work toward a settlement, according to court papers.
But with Sino Clean, Mr. Seiden has been battling Mr. Ren, who the
receiver said reneged on a promise to hold director elections and
disclose current financial information. It took a three-hour
meeting in February in the Chinese city of Xi'an to get the two
sides on the road that led to the pending Sino Clean
settlement.
Courts have also appointed Mr. Seiden receiver for companies
like Southern China Livestock Inc. and Yinlips Technology Inc. He
is also trying to enforce a $367 million Delaware court judgment
against former executives of ChinaCast Education Corp. Southern
China Livestock, Yinlips and the former ChinaCast officials didn't
respond to requests for comment.
Mr. Seiden expects his fees and those of the lawyers and other
professionals he uses to total about $550,000 in the Shengtai case,
a portion of which will be borne by Mr. Liu as part of the
settlement. Mr. Seiden's own fee will be about $120,000 of the
$550,000. He is paid primarily out of the assets he recovers,
subject to court approval, so future fees depend on his ability to
seize assets or settle with the companies' executives.
Investors battling other delisted Chinese companies are pulling
for him to earn more. "I have closely followed his efforts in
China," said Michael Sammons, an investor in three Chinese
companies for which Mr. Seiden may be named a receiver. "[I've]
frankly been amazed at his progress."
Kersten Zhang
Write to Michael Rapoport at Michael.Rapoport@wsj.com
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