SEC and Deloitte China Affiliate Resolve Subpoena Enforcement Action

February 03, 2014

On January 27, 2014, the U.S. Securities and Exchange Commission (“SEC”) and Deloitte’s Chinese affiliate Deloitte Touche Tohmatsu CPA Ltd. (“DTTC”) jointly moved to dismiss without prejudice the SEC’s action to compel production of audit work papers in connection with the SEC’s investigation of China-based Longtop Financial Technologies Limited (“Longtop”), due to recent cooperative efforts of the China Securities Regulatory Commission (“CSRC”).

In May 2011, the SEC issued a subpoena requiring DTTC to produce audit work papers and other documents concerning possible fraud by DTTC’s former client Longtop, a China-based company whose securities are traded in the U.S. DTTC did not produce the documents to the SEC because the Chinese government classified the documents as state secrets and initially prohibited their production. In September 2011, the SEC filed an action to enforce the subpoena.

In July 2012, the SEC requested a stay of the enforcement action pending negotiations for cross-border enforcement cooperation with the CSRC. The SEC formally requested assistance from the CSRC to obtain DTTC’s Longtop documents under the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding. In July 2013, the CSRC agreed to obtain and produce documents responsive to the SEC’s request for assistance. To date, the CSRC has produced over 200,000 pages of audit work papers and related documents concerning Longtop.

In light of the CSRC’s production, the SEC and DTTC have now moved jointly to dismiss the subpoena enforcement action. As announced by the SEC, the dismissal is based on the “substantial volume of documents produced, the cooperation that the CSRC recently has provided to the SEC with respect to Longtop, and DTTC’s statement that it will continue to cooperate with respect to CSRC requests for Longtop-related documents.” The SEC and DTTC agreed that the dismissal should be without prejudice to allow for future intervention by the district court if necessary, and the court so ordered on January 28, 2014.

The dismissal of this subpoena enforcement action against DTTC does not directly impact the SEC’s broader administrative action against the China affiliates of the five largest international accounting firms, including DTTC. In that ongoing action, an SEC administrative law judge recently issued an initial decision imposing sanctions against those firms for failure to comply with subpoenas due to similar concerns regarding Chinese state secrecy laws. The accounting firms have indicated that they will appeal that sanctions order to the Commission, which would then undertake a de novo review. The Commission’s decision, in turn, would be reviewable by the U.S. Court of Appeals.

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This article was originally published by Bingham McCutchen LLP.