China Limits Access to Filings

China has begun limiting access to corporate filings after short-sellers used them to highlight accounting discrepancies that led to stock plunges and regulatory investigations over domestic companies listed abroad.

"In recent months, the Industry & Commerce Administrations in many key cities and provinces around China have implemented measures restricting access to the AIC files of Chinese companies," said Nathan Bush, a Beijing-based partner at the law firm O'Melveny & Myers LLP.

Tighter rules may restrict the ability of short-sellers including Carson Block's Muddy Waters LLC to use the filings to glean detailed financial information on companies. The Communist Party, which begins a leadership transition this year, also faces slowing growth and a 33 percent drop in the Shanghai Composite Index in 2010 through 2011.

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"It may be that short sellers had been using these filings too much and it's been hurting Chinese companies," said Fredrik Oqvist, a Beijing-based independent consultant and analyst. "I've also heard that some higher-up officials have been burned in some of these short cases where they found information through SAIC filings."

While the State Administration for Industry and Commerce has made no public announcement, lawyers and short sellers said getting the documents has become more difficult in some cities. Other lawyers reported no greater difficulty in obtaining files.

Inquiries made to the SAIC's press office were redirected to its company registry bureau, which had no officials answering the phone for three consecutive days. Calls made to the press office today weren't answered. Block of Muddy Waters declined to comment, spokesman Zach Kouwe said in an e-mail.

The documents can provide a trove of information about private Chinese companies, listing financial details such as shareholding structure and registered capital. They may also include the names of board members, along with their phone numbers and home addresses.

"In fairness, Administration of Industry and Commerce records include a bunch of things you would not ordinarily expect to find in a company registry," said Lester Ross, a Beijing-based partner at Wilmer Cutler Pickering Hale and Dorr LLP. "There's some proprietary information in there."

'Fraudulent Scheme'

In June 2011, Muddy Waters accused Sino-Forest Corp. of overstating its assets, triggering a 74 percent drop in its share price on the Toronto Stock Exchange and wiping out about C$3.3 billion ($3.2 billion) of market value by the time shares were suspended from trading in August. Canadian regulators say five of its executives engaged in a "complex fraudulent scheme" that misled investors.

Block's allegations increased investor scrutiny of Chinese companies trading on North American stock exchanges. The Bloomberg Chinese Reverse Mergers Index, which tracks 82 Chinese companies trading on U.S. bourses, fell 62 percent last year while the Standard & Poor's 500 Index was unchanged.

More than 35 non-U.S. companies had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the U.S. Securities and Exchange Commission.

Only Chinese lawyers are allowed to access the documents. In some cases, the government now only grants company record access to Chinese lawyers involved in litigation against a company or when the company gives its permission in writing, according to lawyers including Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai who advises global hedge funds in China.

Oqvist said that by restricting access, Chinese authorities may bring about unintended consequences in a stock market that saw China's 50 million individual investors lose an average of 40,000 yuan last year, according to a May 9 People's Daily report.

"Probably there is going to be some sort of discount across the board for Chinese stocks," Oqvist said. "It's going to be a more risky investment because you can't double-check their figures anymore."

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