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ChinaCast Suspended on NASDAQ, Another Chinese Tech Stock in Turmoil

Steven Millward

The online learning platform ChinaCast (NASDAQ:CAST - News) has had its NASDAQ stocks suspended after failing to file its Form 10K for 2011 on time. It has until April 10th, one week from now, to get its paperwork in order - or become yet another tarnished Chinese tech stock to be implicated in accounting irregularities and face being de-listed. Its shares are now halted at $4.24.

But ChinaCast, which listed way back in 2004, looks unlikely to come back from the brink. Paul Gillis on the China Accounting Blog reports that the firm’s former Chairman and CEO, Ron Chan, has gone off with the crucial accounting records, official seals, and local business licenses after being ousted in January. ChinaCast fired Chan after alleged financial irregularities and a failure to cooperate. A recent open letter [1] by the company to its shareholders says that “blatant disregard of [new board] directives by Ron Chan and certain other managers at the Shanghai location has the potential to put our great Company in unnecessary crisis.” It adds:

Ron Chan and his accomplices have refused to provide the necessary financial information so as to allow the Company’s auditors (Deloitte) access to the Shanghai offices in order to complete their field work and enable the Company to issue its 2011 audited financial statements within the time periods required by the SEC. Additionally, this group of uncooperative managers has improperly declined to pay outstanding invoices for the services of Deloitte and various other outside advisors and service providers.

This could prove to be yet another embarrassing failure for Deloitte in China, after being a dupe in the 2011 Longtop scandal and China Media Express mess that so scarred all Chinese stocks for the rest of the year, making it tough for any local companies to list overseas. Now this year’s audit season could could bring a new Deloitte China disgrace.

ChinacCast could avoid de-listing next week if it submits to NASDAQ a viable plan to get back into SEC compliance.

Ron Chan’s actions on holding company property are being branded as “theft” by the company, but it’s not clear if Shanghai police have become involved in this dispute. Mr Chan’s own resignation letter [2] says that he has “serious disagreements […] with the group of directors” put on the board in a recent reshuffle. He then accuses most of the newly-appointed directors of acting “to promote their own interests at the expense of the Company and its other shareholders” and of ignoring him and other executives in key decisions.

Another contentious issue complicating this matter even further is that ChinaCast uses the Chinese VIE structure to allow overseas investors to collect revenue from its local operations. But that’s a legal grey area in the country, and could be one powerful tool for Ron Chan - or any other feuding board member - if they were to seize control of it.

[Source: China Accounting Blog]

  1. Open letter From ChinaCast’s board, dated April 2nd. ↩

  2. Ron Chan’s open letter to ChinaCast shareholders, dated April 2nd. ↩