The court-appointed receiver empowered to seize the assets of a
Chinese company facing accounting questions says he has obtained
control over subsidiaries of the company, and is in the process of
gaining control over some of its bank accounts.
The moves by the receiver, Robert Seiden, increase the pressure
on China's ZST Digital Networks Inc. (ZSTN), in a high-profile case
that may test the extent to which investors can hold U.S.-traded
Chinese companies accountable for losses they have suffered because
of the companies' accounting and disclosure problems.
In an interview with The Wall Street Journal, Mr. Seiden said he
has taken over ZST Digital subsidiaries in the British Virgin
Islands and Hong Kong. He has also gained control of a ZST bank
account in Hong Kong, and is in the process of doing the same with
ZST bank accounts in China.
In addition, earlier this week Mr. Seiden, armed with an order
from a New York federal judge, seized records from the New York
offices of Crowe Horwath International, a global network of
accounting firms whose Hong Kong affiliate is ZST Digital's
independent auditor. That follows two similar seizures Mr. Seiden
made last month at the Brooklyn, N.Y., home of Henry Ngan, ZST
Digital's chief financial officer, and the Manhattan offices of
Taylor Rafferty, the company's investor-relations firm.
Mr. Seiden hopes to use the seized records to locate other ZST
Digital assets. He declined to put a dollar figure on the value of
the assets he has seized thus far.
"We are aggressively on multiple fronts hunting down assets," he
said.
Mr. Seiden was appointed receiver of ZST Digital in March, as
part of a novel remedy granted to a U.S. investor by the Delaware
Court of Chancery. The court gave Peter Deutsch, a major
shareholder in ZST Digital, the right to force the company to buy
back his shares for more than $32 million--Mr. Deutsch had won a
judgment requiring the company to open its books to him, but ZST
Digital ignored the ruling, and so the judge penalized ZST Digital
by awarding Mr. Deutsch a "put option" to force ZST to buy his
shares back at above-market prices.
Mr. Seiden, the president of New York forensic-investigation
company Confidential Security & Investigations, was tasked with
seizing and selling company assets to satisfy that judgment. Some
observers have suggested Mr. Seiden could have difficulty--ZST's
assets are substantially inside China, and China has previously
refused to cooperate with U.S. regulators in efforts to crack down
on potential accounting fraud at Chinese companies.
If Mr. Seiden is successful, however, it could offer angry
investors a potential strategy to use against other Chinese
companies. Many such companies have seen their shares plunge in the
wake of accounting and disclosure problems in the past two years,
leading to billions of dollars in investor losses.
Mr. Deutsch has said he believes ZST Digital and other Chinese
companies have "gone dark"--withdrawn from U.S. exchanges and
stopping filing with the Securities and Exchange Commission--to
intentionally depress their stock prices and enable the companies
to go private at lowball levels.
ZST couldn't be reached to comment.
Crowe Horwath International has no information pertaining to
ZST, said Kevin McGrath, its chief executive--the global network
includes the Crowe Horwath Hong Kong affiliate that is ZST's
auditor, but the network doesn't do any accounting work itself.
Nonetheless, he said, the company "tried to be cooperative" with
the receiver.
Mr. Ngan and Taylor Rafferty couldn't be reached to comment.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires