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TheStreet Open House

China MediaExpress CFO, Audit Firm Resign

Stocks in this article: CCME

(Updated with further detail from China MediaExpress' news release Monday.)

NEW YORK ( TheStreet) -- The audit firm and the chief financial officer of China MediaExpress (CCME) resigned Monday, and the company said it will delay the filing of its 2010 results with the Securities & Exchange Commission.

In a press release, China MediaExpress said that its audit firm, the Chinese affiliate of Deloitte & Touche, had determined it "was no longer able to rely on the representations of management, and recommended that certain issues encountered during the audit be addressed by an independent investigation."

The audit firm also told China MediaExpress that, most likely, those accounting problems would have "adverse implications" on the company's past financial results.

Investigating Chinese Reverse Mergers

Trading in China MediaExpress's stock has been halted since Friday morning, a move that sparked heated speculation that the company may have arranged for some sort of leveraged buyout, or that it would announce the need to restate its prior financial results.

The company said Monday that it had requested the halt after it received Deloitte's resignation letter. China MediaExpress also said it will form an "independent committee" of its board to investigate the concerns raised by the Deloitte affiliate, and that it has begun a search for a new CFO and auditor.

The company didn't offer an explanation for the resignation of its CFO, Jacky Lam. The earliest it said it could file its 10-K annual report with the SEC, originally slated for Wednesday, would be a month from now.

The company's U.S. public relations firm, the Equity Group, also resigned recently.

It remains unclear when, or if, the stock will begin trading again. The last quoted price on Friday was $11.88, down 50% from its all-time high, set in late January. Nasdaq changed the stock's status to a T12 halt, meaning that the exchange has requested more information from China MediaExpress, and that trading will remain halted pending its receipt.

Days after the stock reached that record high in January, the first in a series of scathing research reports compiled by short sellers hit the blogosphere, purporting to offer evidence that the company was cooking its books. China MediaExpress, based in the coastal city of Fuijian, sells ad space on LED screens that are installed on intercity and airport buses. Among other things, the shorts questioned the company's profit-margin claims, which were far wider than its peers in China.

Those critical missives sparked a rancorous debate between investors who are long the stock and believe in its growth opportunities and those who are short the stock and believe the company is a sham. Over the weekend, a blogger and financial journalist, Roddy Boyd, joined the fray with a highly detailed investigative piece on China MediaExpress, also alleging that the company was engaged in financial fraud.

The announcement Monday appears to vindicate that bearish view.

At one point in January, before the controversy broke, China MediaExpress approached $1 billion in market cap. It was also among the most heavily shorted stocks in the U.S., with some 58% of its float sold short as of Feb. 28.

China MediaExpress's travails are the latest in a series of blowups by small-cap Chinese companies that have sought to raise capital in the United States. Dozens of others, many of which have come public on this side of the Pacific through a process called a reverse merger, have been accused of fraud, mostly by short sellers. Other investors have defended the sector, saying that the bad eggs are few and far between.

The controversy has sparked regulatory scrutiny. The SEC has been conducting a broad investigation into the Chinese reverse-merger phenomenon, examining both individual companies as well as the gatekeepers who help find and bring Chinese businesses to U.S. capital markets through the reverse-merger process, including promoters, investment bankers, auditors and law firms.

Also Monday, trading was halted in the Chinese fertilizer producer China Agritech (CAGC), another reverse-merger company beset by allegations of fraud, most recently by the short seller John Hempton of Bronte Capital. Later Monday, the company announced that it had decided to dismiss its auditor, the China-based affiliate of Ernst & Young.

The affiliate, Ernst & Young Hua Ming, had also been engaged to test China Agritech's internal accounting and financial controls, as required by U.S. regulators under the Sarbanes-Oxley Act. According to China Agritech in its press release Monday, "the public and the management team have raised doubts about this service agreement's impact on Ernst & Young Hua Ming's independence to act as the Company's auditor."

China Agritech added that it is "actively seeking a new auditor to finish the audit work for 2010 and file with the Securities and Exchange Commission with the least delay possible."

--Written by Scott Eden in New York

>To contact the writer of this article, click here: Scott Eden.

>To follow the writer on Twitter, go to http://twitter.com/ScottEden.

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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