FAIR Canada Newsletter
June 2011 |
Sino Forest/Muddy Waters Scandal Raises Systemic Questions |
FAIR Canada questions whether investment dealers, the TSX and regulators have properly assessed the risks that emerging market listings pose to the reputation of the Canadian capital markets and to Canadian investors. Has there been adequate due diligence, among other things, with respect to management and directors? Does the number of China listings with accounting irregularities and independent auditor resignations raise questions about the adequacy of accounting and auditing requirements? When something goes wrong, do Canadian regulators have the ability to regulate and investigate these companies when the mind and management, business and books and records are thousands of miles away in a foreign country and with documents written in a foreign language? Canadian investors lost over $250 million in two TSX-listed China IPO scams in the mid-1990s. Santayana famously said: "Those who cannot remember the past are condemned to repeat it." Today, we have a repeat of the 1990s with many China listings blowing up both in Canada and the U.S. The main difference is that the financial losses to investors are more than ten times greater.
FAIR Canada's Executive Director, Ermanno Pascutto, appeared on BNN to discuss the retail investor perspective on the regulatory issues raised by the Sino Forest/Muddy Waters fiasco. Ermanno called for rules to regulate the disclosure and dissemination of price sensitive information by short sellers to ensure a fair and orderly market. He also called for the establishment of a task force to examine the risks posed to Canadian investors and the reputation of Canadian markets by listings from China and other emerging markets. Click here for the BNN interview.
The U.S. SEC's Office of Investor Education and Advocacy recently issued an Investor Bulletin on Reverse Mergers which focuses on the enforcement actions against Chinese businesses listed on U.S. exchanges or trading on U.S. markets. Meanwhile, in a speech to the Council of Institutional Investors, SEC Commissioner Aguilar questions whether certain foreign companies are abusing the U.S. capital formation process.
The Hong Kong Exchange and the Hong Kong Securities and Futures Commission are the experts at regulating China listings and Hong Kong gets the cream of the crop of Chinese IPOs. Hong Kong regulators understand the elevated risks of listing private businesses from Mainland China (particularly as compared to the listing of Chinese state enterprises). The Chief Executive of the Hong Kong Exchange has stated that Hong Kong is better placed to regulate China listings than North America. See this Reuter's article on Hong Kong's view on the difficulty of regulating China listings.
We hope that investment dealers, the TSX and regulators in Canada will address these issues on a timely basis for the benefit of Canadian retail investors and the reputation of our markets.
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