Deloitte and Goldman Join in China Challenges

The New York Times reported today that the SEC is investigating Longtop Financial Technologies, a Chinese software company that was taken public in 2007 by Goldman Sachs, with Deloitte & Touche as their auditors. Deloitte immediately resigned and Longtop's trading has been halted. Of course we never know how these things end and no charges or findings have been made against the company.

I have avoided getting into specific company issues as the China troubles have unfolded in the last year or so. I raise this one only to clarify that, to the extent these challenges are developing, it is not the method of going public that has increased the likelihood of a problem, since Longtop did a traditional IPO with the top investment bank and accounting firm around.

And it sounds like much of the same sorts of problems as encountered in companies that completed reverse mergers. Deloitte said they resigned in part because of "recently identified falsity" in Longtop's financial records," in addition to "deliberate interference" by the company's executives in Deloitte's audit work. We have heard very similar allegations made by auditors resigning from reverse merged companies.

And a number of Chinese companies facing problems that completed reverse mergers had the same amount of investor protection as an IPO - they did complete a reverse merger and PIPE, but before a single share traded a fully underwritten and due diligenced public offering took place.

I hope those who are trying to blame reverse mergers for problems in Chinese companies will focus instead on the companies themselves and not the manner in which they began trading.

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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