A federal judge in Washington is weighing whether to force a Chinese unit of a financial services powerhouse to appear in court in a potential billion-dollar securities fraud investigation.
The U.S. Securities and Exchange Commission said in September it wants the Shanghai unit of Deloitte Touche Tohmatsu Ltd., the audit, tax and financial services firm, to turn over documents regarding its work for a Cayman Islands-based company called Longtop Financial Technology Ltd.
Longtop is the target of an SEC securities fraud probe. D&T Shanghai, a Chinese member firm of the United Kingdom-based Deloitte, performed auditing services for Longtop for several years before terminating its ties in May over issues of alleged financial impropriety.
Magistrate Judge Deborah Robinson did not rubber-stamp the government’s request for an order to show cause, which would force D&T Shanghai to appear in court in Washington to respond to the SEC’s demand for documents.
At a hearing earlier this month, Robinson ordered the SEC to provide greater detail about why the government thinks the judge has the power to issue an order to show cause in a case where the foreign company has not been served with the government’s show-cause application and has not made an appearance in the case.
SEC lawyers Thursday night told Robinson it’s entirely appropriate to issue the show-cause order, a move that would trigger subpoena enforcement proceedings but not deprive D&T Shanghai any substantive rights.
A lawyer for the SEC, Mark Lanpher, said in a court filing (PDF) that only after D&T Shanghai has been served with the show-cause order will the government then ask Robinson to issue an order directing the company to respond to the underlying administrative subpoena.
D&T Shanghai has told the SEC that its U.S. counsel, Michael Warden, a Sidley Austin partner in Washington, is not authorized to accept service of any order to show cause. Service must be made through the Hague Convention, the international treaty that addresses service of court papers, the company said.
But the SEC said yesterday nothing under the Hague Convention stops a federal trial judge from authorizing service on a foreign company’s U.S. counsel.
“That is because the proposed method of serving the respondent would not involve directly sending documents into China or any other conduct that would constitute an affront to China’s sovereignty,” Lanpher said.
Lanpher also said that requiring the SEC to use the Hague Convention procedure “will be a substantial delay and a waste of resources.”
“Forcing the SEC to resort to the Hague Convention in a case such as this would require the SEC to send court papers halfway around the world (literally) all so that those papers can be returned to U.S. counsel who has already received and reviewed them,” Lanpher said.
The SEC is also trying to convince Robinson that D&T Shanghai is already well-represented and knows the substance of the proceedings in U.S. District Court for the District of Columbia.
Lanpher noted that Sidley’s Warden has been in regular contact with the government in recent weeks. Warden attended the Oct. 7 hearing in the case. Warden, however, sat in the gallery. (Warden, who represents accountants and professional service firms, was not reached for comment this afternoon.)
Longtop reported total revenue of $169 million in the fiscal year that ended in March 2010, court records show. The New York Stock Exchange halted trading in May on the company’s American depositary shares. At the time, Longtop had a market capitalization of about $1.08 billion. Deloitte’s Shanghai unit audited the company’s financial statements several years before and after Longtop’s initial public offering in the United States in 2007.
The SEC served the administrative subpoena on D&T Shanghai’s counsel, Douglas Cox, a Gibson, Dunn & Crutcher partner, in the United States. Cox, vice-chair of the firm’s crisis management practice group, was authorized to accept the subpoena on behalf of D&T Shanghai, court records show.
D&T Shanghai’s lawyers later told the SEC that the company cannot be forced to turn over documents that predate the enactment of the Dodd-Frank Wall Street reform legislation and that turning over any documents could expose the company to sanction under Chinese law.
Robinson did not immediately rule on the SEC’s request for an order to show cause.
Updated 5:35 p.m.