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Can regulators require accounting firms to provide documents for investigations?

In May 2011, the U.S. Securities and Exchange Commission ("the SEC") issued a subpoena against Deloitte Touch Tohmatsu CPA Ltd ("DT"), requiring Deloitte Touche Shanghai ("DT Shanghai") to produce documents to assist it in its investigation of possible fraud and other violations concerning the securities of Longtop Financial Technologies Ltd ("Longtop"), a foreign private issuer, the securities of which are registered with the SEC and traded on U.S. markets. DT Shanghai had audited Longtop's financial statements for several years, before it resigned as auditor in May 2011, after discovering numerous financial improprieties.

Notwithstanding that D&T Shanghai acknowledged that it was in possession of a vast number of documents responsive to the subpoena, it did not produce the same to the SEC, meaning that the SEC could not gain access to information critical to its investigation, which had been authorized for the protection of public investors. Accordingly, in September 2011, the SEC filed a subpoena enforcement action against DT for failing to produce the documents. Pursuant to its application, the SEC sought a court order directing DT Shanghai to show cause why the court should not order DT Shanghai to produce documents responsive to the subpoena.

On 27 January 2014, the SEC and DT filed a joint motion with the court to dismiss (without prejudice) SEC's subpoena enforcement action against DT because the SEC had recently received a substantial volume of documents required by the subpoena, including DT audit work papers and various other documents relating to Longtop. The documents were produced by the China Securities Regulatory Commission ("the CSRC") in response to the SEC's request for its assistance and after the CSRC had obtained the documents from DT.

In view of the substantial volume of documents produced, the cooperation provided by the CSRC to the SEC and DT's statement that it would continue to cooperate with the CSRC's requests for Longtop related documents, the SEC considered that it did not currently need the court's assistance. The SEC and DT agreed that dismissal of the motion should be "without prejudice", meaning that the SEC can always go back to court and seek it's assistance in future, if it needs to. Accordingly, on 28 January 2014, the court dismissed (without prejudice) the SEC's subpoena enforcement action.

The resolution of the disputes, whilst good news for the parties, mean that there is no determination by the US court on the issue of whether a PRC company, like DT Shanghai, is obliged to provide documents to US regulators even though that party was allegedly prohibited from doing so under state secrecy law in the PRC.

In Hong Kong, there are similar proceedings before the Court of First Instance, by the Securities and Futures Commission ("the SFC") against Ernst and Young Hong Kong ("Ernst and Young") for failing to produce accounting records relating to its work as reporting accountant and auditor for Standard Water Ltd, before it resigned as that company's auditor in March 2010. Ernst and Young resigned citing "inconsistencies in documentation in a number of areas that lead us to the conclusion that we can no longer continue as auditors".

The SFC issued statutory notices to Ernst & Young, under section 183 of the Securities and Futures Ordinance (Cap 571) ("the SFO"), seeking the audit working papers and underlying accounting documents relating to Standard Water, which the SFC needed in respect of its investigation of Standard Water's failed IPO. Ernst & Young did not comply with this request, claiming that it did not have the relevant records, which were held in the PRC by its joint venture partner, Ernst & Young Hua Ming (EY Hua Ming), whose staff were the ones involved in the engagement. Ernst & Young subsequently claimed that the documents could not be produced because of restrictions under PRC law.

The SFC sought the assistance of the relevant authority in the PRC, using its standing arrangements for mutual assistance in investigatory matters. However, EY Hua Ming also failed to produce the records to the relevant PRC authority as requested. Accounting and audit working papers relating to private companies applying for listing in Hong Kong must be capable of being produced either directly to the SFC or via the relevant PRC authority under the standing arrangements for cooperation, especially where the SFC is investigating suspected misconduct.

The SFC is invoking section 185 of the Securities and Futures Ordinance, which empowers the Court of First Instance to inquire into the circumstances of Ernst & Young's non-compliance with the SFC's request for the records. The Court can order Ernst & Young to comply with the SFC's request, if satisfied that Ernst & Young does not have any reasonable excuse for not complying. The SFC brought the proceedings after consulting with the relevant PRC authority about access to the records and the SFC and relevant PRC authority are working closely together in relation to this issue.

The court hearing was part heard in March 2013 and resumed in May 2013. The court has not yet handed down its judgment.

Key Contacts

Joseph Kwan

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9324

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