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BEIJING—China MediaExpress Holdings Inc. once seemed like a small gem among a heap of Chinese companies listing shares in the U.S.
Boasting rapid growth and big profits from selling advertising on video screens in Chinese intercity buses, it drew tens of millions of dollars from marquee investors. It listed its shares on the Nasdaq Stock Market, where its chief executive rang the opening bell last June.
Today, MediaExpress is in chaos, its shares no longer traded on Nasdaq after a turbulent few months marked by investors' concerns over the size of its business and questions over its accounting.
It is one of dozens of companies from China that have come under fire by investors and regulators for allegedly misleading investors, exposing a loophole that has U.S. regulators concerned.
The company's auditor, Deloitte Touche Tohmatsu, resigned in March, saying that it had raised concerns over "possible undisclosed bank accounts and bank loans," and "issues concerning the validity of certain advertising agents/customers and bus operators," among other issues, according to a MediaExpress regulatory filing verified by Deloitte.
The accounting firm also said it felt it could "no longer"¦rely on the representations of management" and had "lost confidence" in the MediaExpress board's commitment to "reliable financial reporting."
MediaExpress said in the filing with the U.S. Securities and Exchange Commission that it "believes that it was working to address" the items Deloitte raised.
The same month, Starr International Co., an insurance and investment vehicle run by former American International Group Inc. chief Maurice "Hank" Greenberg, sued MediaExpress in federal court in Delaware. In its suit, Starr claims that it bought $13.5 million of the company's stock in October on the basis of MediaExpress news releases and SEC filings that Starr alleges repeatedly overstated MediaExpress's income and the size of its operations. Starr bases its claims largely on analyst reports and the earlier Deloitte statements alleging that MediaExpress had made fraudulent statements throughout 2010.
Starr also said it separately had initiated arbitration in Hong Kong over MediaExpress's agreements in a separate $30 million Starr investment made in January 2010.
In May, Starr also sued MediaExpress in Delaware state court, alleging that the company failed to turn over certain books and records when Starr asked for them, in violation of Delaware law.
MediaExpress hasn't filed an answer to the federal lawsuit. But in a response to the Delaware suit, it denied it had an obligation to turn over the books and records Starr requested, and said Starr's allegations in the federal suit were based largely "on the claims of anonymous bloggers or short sellers."
Trading in MediaExpress's shares was suspended in March after a 50% drop erased almost $400 million in market value. On May 19, MediaExpress said Nasdaq had decided to delist its shares.
The shares now trade over the counter at $1.80, compared with nearly $23 on Jan. 27, valuing Starr's stake at about $11 million, assuming the conversion of all warrants and preferred stock.
MediaExpress has denied its critics' assertions, blaming short sellers—investors who make money when a stock price declines—for attacking its shares. It said in early May that it had commissioned international law firm DLA Piper to investigate the allegations against it. A spokeswoman for DLA Piper declined to comment.
Underscoring the SEC's broader concerns, the regulator is examining accounting and disclosure issues regarding Chinese companies that listed in the U.S. through a backdoor process known as a "reverse merger" or "reverse takeover" that requires them to disclose a lot less information to investors than a traditional initial public offering.
"Given the potential risks, investors should be especially careful when considering investing in the stock of reverse-merger companies," Lori Schock, the SEC's director of investor education and advocacy, said in a blunt warning on Thursday.
The Wall Street Journal reported last week that the SEC also is investigating some of the Chinese companies' U.S. auditors, too, and that the inquiry is expected to lead to enforcement cases.
A MediaExpress spokesman said the SEC had contacted its audit committee and lawyers. He wouldn't say when. He said the company plans to report the results of its internal investigation to the agency. The SEC declined to comment.
A survey by the U.S. Public Company Accounting Oversight Board, which monitors auditors, identified 159 Chinese companies from the start of 2007 through March 2010 that listed in the U.S. through reverse takeovers. That is almost three times the number of Chinese companies that launched traditional IPOs in the U.S. over the same period. While most reverse-takeover companies are small, as a group they pack weight: Those covered by the survey had a total market capitalization of $12.8 billion in March 2010.
"While the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud," said Luis Aguilar, a commissioner of the U.S. Securities and Exchange Commission, in April.
Several other Chinese reverse-takeover companies also have been suspended or delisted. China Agritech Inc., of which private-equity firm Carlyle Group LLC owns 22%, according to data provider LionShares, was delisted from the Nasdaq on May 20 after Agritech fired its auditor, the Chinese branch of Ernst & Young, which had questioned the company's financial statements.
A Carlyle spokeswoman declined to comment on Agritech specifically. Asked in an interview last month about Agritech and another Chinese company in which Carlyle invested whose CEO is facing allegations of embezzlement, Carlyle co-founder David Rubenstein said, "It's hard to know what additional steps" Carlyle might have taken, "but obviously something could have been done better."
Agritech didn't reply to a request for comment.
In all, billions of dollars in market value have vaporized in reverse-takeover companies that have come under criticism from investors, auditors and short sellers. In April, the SEC suspended trading in RINO International Corp., a formerly Nasdaq-listed company that makes environmental equipment for the steel industry, citing the resignation of its independent directors as well as questions about the company's size and finances. The SEC didn't say who raised those questions. The stock has since resumed trading. RINO's market capitalization is now less than $20 million, from $5.4 billion at the end of 2007.
RINO's SEC filings list a phone number for its parent company, RINO Group. A woman at RINO Group who identified herself as a personal secretary to the president and asked that her name not be used, said the company can't comment on its dealings with the SEC, and that no one else at the company could speak to the media.
The SEC's ability to discipline these companies is limited. Reverse takeovers are legal, and the agency's jurisdiction doesn't extend into China, so it can't subpoena documents and people. With company assets and most senior executives in China, the U.S. has limited scope to enforce any decisions against them.
MediaExpress programs entertainment and sells ad space on video screens installed in buses. The business originally was limited to intercity buses. Its expansion into airport express buses drove it to look into raising capital in the U.S, but the financial crisis scuttled plans to list via an IPO, according to a spokesman for the CEO.
The company listed its shares through a reverse takeover on NYSE Euronext's American Stock Exchange in October 2009 and immediately raised $46 million from investors. At one point, hedge fund D.E. Shaw & Co. was among its investors.
In January 2010, Mr. Greenberg's Starr International poured $30 million into the company, in a private placement, which gave Starr preferred shares plus warrants to buy more shares at a given price later. MediaExpress's moved its listing to Nasdaq in June last year.
MediaExpress continued to report rapid growth in earnings. In October, Starr International sank the additional $13.5 million into MediaExpress.
But short sellers were becoming suspicious because of its stellar results. In its third-quarter results, released in November, MediaExpress's return on assets far outstripped those of the three major Chinese "out-of-home" advertising companies listed in the U.S.; it was three times higher than the next best performer. And whereas the other firms target a white-collar audience, the long-distance buses in which MediaExpress installs its screens are mainly used by less-affluent students and migrant workers.
Then things started unraveling. In early February, three investors who had shorted the stock, issued negative reports on the company. All three short sellers said they acted independently. A report by one of them, Muddy Waters Research, gained particular attention. It alleged that MediaExpress had fewer than half the 27,200 buses than it tells investors are in its network. MediaExpress denied the assertion.
The competing claims by Muddy Waters and MediaExpress are hard to verify, in part because no official information on bus registrations is publicly available.
The Journal tried to contact a bus company that MediaExpress has claimed is one of its biggest partners, Shanghai Bus Industrial Group Co. MediaExpress Chief Executive Cheng Zheng said in a February letter published on its website that it had a contract with Shanghai Bus to carry MediaExpress screens on 1,892 intercity buses.
Shanghai Bus ceased to exist in 2009 after splitting into two differently named entities. Its transport business was injected into Shanghai Ba-Shi Public Transportation Group Co.
A spokesman for MediaExpress who identified himself as Mr. Li said Shanghai Ba-Shi is the company with which MediaExpress now has a contract. In an April interview arranged by MediaExpress after repeated requests for comment from its CEO, Mr. Li said most of Shanghai Ba-Shi's more than 20 units work with MediaExpress.
Shanghai Ba-Shi runs thousands of intracity buses, but it has only one unit that runs intercity buses, according to the vice director of the company's general office, who gave his surname as Wu, and two other people who work there. Liu Deqing, an official in the general office of the intercity bus unit, said it has only about 800 vehicles, and that the unit doesn't work with MediaExpress.
MediaExpress's spokesman said the company does business with multiple units of Shanghai Ba-Shi, and that the results of the internal investigation being conducted by DLA Piper will validate its previous claims.
At one of the biggest long-distance bus terminals in Shanghai, a gleaming depot run by Shanghai Ba-Shi, none of the three buses idling during a recent Journal visit carried MediaExpress screens. Instead, the bus drivers determined what to load onto the buses' hard drives.
"You'll find that every bus has got a different set of movies," said a deputy station master, Wang Hui.
Mr. Li, the MediaExpress spokesman, said the company now has misgivings about how it listed in the U.S. "We had never considered that this way of listing would come [at the expense] of investor trust," he said.
WSJ
Boasting rapid growth and big profits from selling advertising on video screens in Chinese intercity buses, it drew tens of millions of dollars from marquee investors. It listed its shares on the Nasdaq Stock Market, where its chief executive rang the opening bell last June.
Today, MediaExpress is in chaos, its shares no longer traded on Nasdaq after a turbulent few months marked by investors' concerns over the size of its business and questions over its accounting.
It is one of dozens of companies from China that have come under fire by investors and regulators for allegedly misleading investors, exposing a loophole that has U.S. regulators concerned.
The company's auditor, Deloitte Touche Tohmatsu, resigned in March, saying that it had raised concerns over "possible undisclosed bank accounts and bank loans," and "issues concerning the validity of certain advertising agents/customers and bus operators," among other issues, according to a MediaExpress regulatory filing verified by Deloitte.
The accounting firm also said it felt it could "no longer"¦rely on the representations of management" and had "lost confidence" in the MediaExpress board's commitment to "reliable financial reporting."
MediaExpress said in the filing with the U.S. Securities and Exchange Commission that it "believes that it was working to address" the items Deloitte raised.
The same month, Starr International Co., an insurance and investment vehicle run by former American International Group Inc. chief Maurice "Hank" Greenberg, sued MediaExpress in federal court in Delaware. In its suit, Starr claims that it bought $13.5 million of the company's stock in October on the basis of MediaExpress news releases and SEC filings that Starr alleges repeatedly overstated MediaExpress's income and the size of its operations. Starr bases its claims largely on analyst reports and the earlier Deloitte statements alleging that MediaExpress had made fraudulent statements throughout 2010.
Starr also said it separately had initiated arbitration in Hong Kong over MediaExpress's agreements in a separate $30 million Starr investment made in January 2010.
In May, Starr also sued MediaExpress in Delaware state court, alleging that the company failed to turn over certain books and records when Starr asked for them, in violation of Delaware law.
MediaExpress hasn't filed an answer to the federal lawsuit. But in a response to the Delaware suit, it denied it had an obligation to turn over the books and records Starr requested, and said Starr's allegations in the federal suit were based largely "on the claims of anonymous bloggers or short sellers."
Trading in MediaExpress's shares was suspended in March after a 50% drop erased almost $400 million in market value. On May 19, MediaExpress said Nasdaq had decided to delist its shares.
The shares now trade over the counter at $1.80, compared with nearly $23 on Jan. 27, valuing Starr's stake at about $11 million, assuming the conversion of all warrants and preferred stock.
MediaExpress has denied its critics' assertions, blaming short sellers—investors who make money when a stock price declines—for attacking its shares. It said in early May that it had commissioned international law firm DLA Piper to investigate the allegations against it. A spokeswoman for DLA Piper declined to comment.
Underscoring the SEC's broader concerns, the regulator is examining accounting and disclosure issues regarding Chinese companies that listed in the U.S. through a backdoor process known as a "reverse merger" or "reverse takeover" that requires them to disclose a lot less information to investors than a traditional initial public offering.
"Given the potential risks, investors should be especially careful when considering investing in the stock of reverse-merger companies," Lori Schock, the SEC's director of investor education and advocacy, said in a blunt warning on Thursday.
The Wall Street Journal reported last week that the SEC also is investigating some of the Chinese companies' U.S. auditors, too, and that the inquiry is expected to lead to enforcement cases.
A MediaExpress spokesman said the SEC had contacted its audit committee and lawyers. He wouldn't say when. He said the company plans to report the results of its internal investigation to the agency. The SEC declined to comment.
A survey by the U.S. Public Company Accounting Oversight Board, which monitors auditors, identified 159 Chinese companies from the start of 2007 through March 2010 that listed in the U.S. through reverse takeovers. That is almost three times the number of Chinese companies that launched traditional IPOs in the U.S. over the same period. While most reverse-takeover companies are small, as a group they pack weight: Those covered by the survey had a total market capitalization of $12.8 billion in March 2010.
"While the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud," said Luis Aguilar, a commissioner of the U.S. Securities and Exchange Commission, in April.
Several other Chinese reverse-takeover companies also have been suspended or delisted. China Agritech Inc., of which private-equity firm Carlyle Group LLC owns 22%, according to data provider LionShares, was delisted from the Nasdaq on May 20 after Agritech fired its auditor, the Chinese branch of Ernst & Young, which had questioned the company's financial statements.
A Carlyle spokeswoman declined to comment on Agritech specifically. Asked in an interview last month about Agritech and another Chinese company in which Carlyle invested whose CEO is facing allegations of embezzlement, Carlyle co-founder David Rubenstein said, "It's hard to know what additional steps" Carlyle might have taken, "but obviously something could have been done better."
Agritech didn't reply to a request for comment.
In all, billions of dollars in market value have vaporized in reverse-takeover companies that have come under criticism from investors, auditors and short sellers. In April, the SEC suspended trading in RINO International Corp., a formerly Nasdaq-listed company that makes environmental equipment for the steel industry, citing the resignation of its independent directors as well as questions about the company's size and finances. The SEC didn't say who raised those questions. The stock has since resumed trading. RINO's market capitalization is now less than $20 million, from $5.4 billion at the end of 2007.
RINO's SEC filings list a phone number for its parent company, RINO Group. A woman at RINO Group who identified herself as a personal secretary to the president and asked that her name not be used, said the company can't comment on its dealings with the SEC, and that no one else at the company could speak to the media.
The SEC's ability to discipline these companies is limited. Reverse takeovers are legal, and the agency's jurisdiction doesn't extend into China, so it can't subpoena documents and people. With company assets and most senior executives in China, the U.S. has limited scope to enforce any decisions against them.
MediaExpress programs entertainment and sells ad space on video screens installed in buses. The business originally was limited to intercity buses. Its expansion into airport express buses drove it to look into raising capital in the U.S, but the financial crisis scuttled plans to list via an IPO, according to a spokesman for the CEO.
The company listed its shares through a reverse takeover on NYSE Euronext's American Stock Exchange in October 2009 and immediately raised $46 million from investors. At one point, hedge fund D.E. Shaw & Co. was among its investors.
In January 2010, Mr. Greenberg's Starr International poured $30 million into the company, in a private placement, which gave Starr preferred shares plus warrants to buy more shares at a given price later. MediaExpress's moved its listing to Nasdaq in June last year.
MediaExpress continued to report rapid growth in earnings. In October, Starr International sank the additional $13.5 million into MediaExpress.
But short sellers were becoming suspicious because of its stellar results. In its third-quarter results, released in November, MediaExpress's return on assets far outstripped those of the three major Chinese "out-of-home" advertising companies listed in the U.S.; it was three times higher than the next best performer. And whereas the other firms target a white-collar audience, the long-distance buses in which MediaExpress installs its screens are mainly used by less-affluent students and migrant workers.
Then things started unraveling. In early February, three investors who had shorted the stock, issued negative reports on the company. All three short sellers said they acted independently. A report by one of them, Muddy Waters Research, gained particular attention. It alleged that MediaExpress had fewer than half the 27,200 buses than it tells investors are in its network. MediaExpress denied the assertion.
The competing claims by Muddy Waters and MediaExpress are hard to verify, in part because no official information on bus registrations is publicly available.
The Journal tried to contact a bus company that MediaExpress has claimed is one of its biggest partners, Shanghai Bus Industrial Group Co. MediaExpress Chief Executive Cheng Zheng said in a February letter published on its website that it had a contract with Shanghai Bus to carry MediaExpress screens on 1,892 intercity buses.
Shanghai Bus ceased to exist in 2009 after splitting into two differently named entities. Its transport business was injected into Shanghai Ba-Shi Public Transportation Group Co.
A spokesman for MediaExpress who identified himself as Mr. Li said Shanghai Ba-Shi is the company with which MediaExpress now has a contract. In an April interview arranged by MediaExpress after repeated requests for comment from its CEO, Mr. Li said most of Shanghai Ba-Shi's more than 20 units work with MediaExpress.
Shanghai Ba-Shi runs thousands of intracity buses, but it has only one unit that runs intercity buses, according to the vice director of the company's general office, who gave his surname as Wu, and two other people who work there. Liu Deqing, an official in the general office of the intercity bus unit, said it has only about 800 vehicles, and that the unit doesn't work with MediaExpress.
MediaExpress's spokesman said the company does business with multiple units of Shanghai Ba-Shi, and that the results of the internal investigation being conducted by DLA Piper will validate its previous claims.
At one of the biggest long-distance bus terminals in Shanghai, a gleaming depot run by Shanghai Ba-Shi, none of the three buses idling during a recent Journal visit carried MediaExpress screens. Instead, the bus drivers determined what to load onto the buses' hard drives.
"You'll find that every bus has got a different set of movies," said a deputy station master, Wang Hui.
Mr. Li, the MediaExpress spokesman, said the company now has misgivings about how it listed in the U.S. "We had never considered that this way of listing would come [at the expense] of investor trust," he said.
WSJ
