Part 2: China Cover-Up by the U.S. Securities and Exchange Commission (SEC)
E-House (NYSE:EJ) was bought out by board members in Aug. 2016. Material misstatements and omissions by the Chinese buyer group surfaced. Why didn't the SEC do anything to protect American investors?
Part 1 Summary
Part 1 covered the SEC, led by Wall Street attorney Jay Clayton, significant conflicts of interest, and nonfeasance related to Weibo's sale of ByteDance shares with no transparency. Direct owners in Weibo, as well as shareholders in two other publicly traded companies, Alibaba and Sina, likely suffered substantial harm. The SEC did nothing.
Today, Weibo’s 5 percent stake in ByteDance would be worth over $15 billion. Weibo’s (NASDAQ: WB) entire company is now worth only $4.5 billion as somebody walked away with billions.
Part 1 also raised an important question: why is current SEC Chairman Gary Gensler and the White House continuing to mislead the American people about Chinese executives U.S. capital markets deceits?
Part 2 reveals a similar scheme, more deep conflicts, and the same SEC do nothing approach to protect American savings from Chinese frauds.
A second claim emerges, the E-house delisting scheme
In August 2016, SINA (Charles Chao), Neil Shen (Sequoia Capital), and Xin Zhou (E-House) took E-house private from the NYSE for slightly over $1 billion dollars. [Note: Sina and Chao, as well as Neil Shen (Sequoia Capital), were also associated with the Weibo/ByteDance share transfer claims in Part 1]
E-House (China), the largest real estate broker in mainland China, works closely with real estate developers to sell properties. Chinese buyers frequently pay in full for these properties before they are built, providing developers with a source of cash flow. It went public on the NYSE and was a way for U.S. investors to get in on China’s burgeoning real estate market.
For many years, E-House has served as the primary realtor for development firms such as Evergrande. These are the same China developers in the news today that are cratering China’s financial markets and banking system.
The current bank riots are being driven not by the Chinese Communist Party's (CCP) openness — they conceal their crimes — but by poor Chinese citizens who are forced to continue paying mortgages on properties that have never been delivered.
The SEC and others, again had the opportunity to protect not only American investors, but Chinese citizens and instead turned the other away and protected the elite's schemes.
E-house dissenter hearing in the Cayman Islands surfaces the actual frauds
SINA (Chao), Shen, and Zhou were subject to a shareholders dissenter (section 238) lawsuit in the Cayman Islands with their E-house take-private deal in 2016. [Note: Cayman law has some protections for U.S. investors, so the Chinese variable interest entity or “VIE” model is not necessarily a bad thing.]
In 2018, during these Cayman proceedings re E-House (China) Holdings Ltd., No. FSD 170 of 2016 (IMJ), discovery revealed that SINA (Chao), Shen, and Zhou had committed a number of frauds (misrepresentations and omissions) in an attempt to steal E-house at a lowball price from its NYSE shareholders.
The Cayman dissenter trial was settled on the second day of the hearings for an undisclosed amount.
A prominent U.S. law firm files an SDNY class action suit based on the Cayman hearing fraud information
In April 2020, an SDNY class action complaint complaint was filed where SINA (Chao), Shen, and Zhou are the main Defendants. The complaint alleges the triumvirate misrepresented (understated) E-financial House's performance in SEC proxies; concealed their true plans to list the company again in Hong Kong; and omitted other positive developments at E-house in order to steal the business at a low price from NYSE shareholders.
One of the positive developments omitted from shareholders by the Defendants, who also served on the E-house board of directors, was a new round of funding was concealed (not disclosed in proxies). Over 20 of China’s top real estate developers were going to invest in E-house’s core business immediately after the company was delisted from the NYSE at a substantially higher valuation.
According to the SDNY complaint, intentional and deceptive misrepresentations were also made in order to artificially keep the price of E-House low and induce shareholders to accept an unfairly priced buyout.
Among the deliberate deceptions were the concealment of a second set of more recent financial results (created before presenting final proxy to shareholders). The Buyer group's Shen, Zhou, and SINA (Chao) were so confident in the new financial projections that they signed highly unusual personal guarantees. E-house’s profit growth was four times faster in the higher financial projections than were presented to shareholders and the SEC.
The complaint alleges, E-House and all its assets fair market value should have been over $2.65 billion, which is considerably higher than $1.03 billion paid by SINA (Chao), Zhou, and Shen.
On September 29, 2021, the judge dismissed the SDNY case in favor of SINA, Chao, and Shen for failing to meet the heightened pleading requirements under the Private Securities Litigation Reform Act (“PSLRA”). While the SDNY district judge did give the Plaintiffs a chance to amend the complaint, they instead chose to file an appeal with the 2nd Circuit.
The same circuit (2nd) court of appeals remanded a directly on-point case back to the district court shortly after the Judge issued his E-house decision. A three-judge panel of the 2nd Circuit Court of Appeals overturned the district court's dismissal of the Altimeo Asset Mgmt. v. Qihoo 360 Tech. Co. Ltd case stating “We disagree that the appellants failed adequately to allege any material misrepresentations or omissions. Although pleading standards are heightened for securities fraud claims, “we must be careful not to mistake heightened pleading standards for impossible ones.”
The PSLRA's heightened pleading requirements defense, which was used to dismiss E-House's case with the district court, is not available as a defense against the SEC. It is only applicable in private securities litigation. Even more reason the SEC shouldn’t have done nothing.
The E-house civil case is currently before the 2nd Circuit and will almost certainly be remanded back to the District court
The main issue for consideration is whether the Plaintiffs alleged sufficiently materially false and misleading statements, omissions, or actionable fraudulent conduct [did the judge appropriately apply the PSLRA]. The E-house 2nd Circuit appeal is considerably stronger than the on-point Qihoo case.
Additionally, the Plaintiffs persuasively argued that the lower level judge incorrectly tersely cross-reference and mistakenly used the PSLRA safe harbor put in place for inaccurate forward looking statements to dismiss not only the misrepresentations but also the omissions and scheme claims.
Here is a link to a copy of the 2nd Circuit brief for anyone interested in the full details of the appeal. The reply has not been submitted yet.
What this means, in my opinion, is that Sequoia Capital's Neil Shen, Charles Chao (who recently also delisted Sina and controls Weibo), and Xin Zhou (the CEO of China's largest real estate broker) will almost certainly have to continue to defend civil fraud claims, and the SEC has done nothing.
To back up this claim, Weibo, where Chao is Chairman of the Board of Directors and owns a substantial stake in the company, inserted this highly unusual language in its most recent 2021 annual report (20F).
The E-house claims brings up some important questions
While the E-House claims are straightforward because they surfaced in a court, why did Sina’s board allow Charles Chao to remain as CEO?
In addition to his role running Sequoia Capital’s China funds, Neil Shen, is also a Global Steward of all of Sequoia Capital. Did Sequoia Capital read the E-House claims? Did they just chose to ignore Shen’s conduct because of the profit he makes in China?
The SEC is not even willing to pursue claims where the facts related to deceptions on U.S. investors have been reveled in a court of law?
[Note: In his own party, Rep. Bradley Sherman approached Chairman Gensler about the SEC's unwillingness to pursue frauds against RenRen, which paid $300 million in a civil lawsuit. By failing to pursue any claims, the SEC allows executives to continue deceiving American investors while unjustly supporting the CCP and China's markets. There was no public response. Sherman tried to hide as a SPAC issue]
More SEC conflicts arise in relation to E-house and its owners. Once again, no action is taken
Leiming Chen, William Hinman's SEC colleague who appeared in the Hinman emails as part of the XRP/Ripple litigation, was the attorney who took E-house public back in 2007. Chen also worked as a lead attorney on the Alibaba IPO with Hinman and Clayton. He is currently a senior executive at Ant Group, an Alibaba spinoff.
The Simpson Thacher team also represented E-house in a 2008 secondary offering.
Julie Gao, from Skadden Arps, who previously represented Weibo, ByteDance, and Sina in Part 1 before becoming CFO of ByteDance, was also on the E-house IPO book.
The Hinman emails from the XRP and Ripple case reveal meetings with Simpson Thacher's Leiming Chen and Chris Lin about China while he was at the SEC. Because Hinman was still being paid by Simpson Thacher through some sort of retirement program, these meetings were in violation of the SEC ethics department mandate. William Hinman returned to Simpson Thacher after leaving the SEC.
In 2015, Sullivan & Cromwell represented Credit Suisse as a financial advisor to Nanpeng "Neil" Shen in connection with Homeinns Hotel Group's take-private transaction. Simpson Thacher represented the board's Special Committee in the Homeinns Hotel Group take-private transaction. Clayton and Hinman's firms have previously collaborated on transactions for Neil Shen and Charles Chao, including the Focus Media transaction.
The SEC is protecting Chinese executives at the expense of America
A pattern of conduct is emerging in which current Sullivan & Cromwell and Simpson Thacher clients appear to be exempt from SEC scrutiny while Clayton and Hinman are at the SEC. There is certainly enough probable cause to warrant a special investigation.
This was Alexander Hamilton's concern in Federalist Paper 22 when he described how individuals cycling in and out of government could open the door to foreign corruption in our republic.
The individuals highlighted in Parts 1 and 2 were well-known and significant clients of the Clayton, Hinman, and Peikin (Enforcement) law firms. Despite the fact that substantial probable cause existed to at least open investigations, nothing was done.
Where, once again, is Chairman Gensler on this? He is not only not using sunlight as a disinfectant, but he is also working to harm American innovation by directing SEC resources toward the Crypto industry and ESG.
Chairman Gensler and others just allowed Neil Shen from Sequoia Capital China, to raise $9 billion from U.S. and other global investors with no warnings about alleged prior conduct.
Not doing anything is causing substantial harm and has helped conceal the Chinese economic mess
The stock of E-house is currently trading at 0.86 Hong Kong Dollars per share, or $0.11. E-house has also recently defaulted on $300 million USD bonds. A Chinese scandal isn't complete unless Alibaba is involved. Yes, despite knowing that the executives were facing civil fraud claims in a U.S. federal court, Alibaba invested in E-House stock and bonds in 2020.
The SEC also had a chance to warn U.S. investors about these bond offerings as well and didn’t fail, but chose not to do so.
Stay tuned for Part 3…