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Fraud claims at Kandi deal new blow to Chinese listings in US

Short-seller questions electric-car maker's sales while SEC readies new rules

Nasdaq's MarketSite building in New York City's Times Square. Nasdaq is a favored destination by Chinese companies looking to list in the U.S.   © Reuters

SHANGHAI/BEIJING/NEW YORK -- A recent spate of accounting irregularities at U.S.-listed Chinese companies grew this week with allegations against electric-vehicle maker Kandi Technologies Group, even as regulators move to ramp up scrutiny.

U.S.-based Hindenburg Research released a report Monday local time accusing Kandi of falsifying sales, asserting that its largest customer, representing about 55% of so-called "last 12 months" sales, "shares a phone number with a Kandi subsidiary, and shared an executive with Kandi." The short-selling firm also pointed to frequent changes in chief financial officers and auditors as a possible sign of fraud and combed through its past results and future plans for evidence.

Such reports have appeared with growing frequency in recent months, showing the consequences of U.S. regulators' focus on attracting big Chinese names while letting oversight fall by the wayside.

Accusations from short-sellers can do real damage. General Motors scaled down plans for a capital and business tie-up with Nikola after Hindenburg issued a similarly scathing report on the American electric-vehicle maker in September.

In Kandi's case, its Nasdaq-listed shares tumbled nearly 30% on the day of the report's release. The automaker objected to the allegations, arguing that the report "contains numerous errors, misstatements of historical facts, inaccurate conclusions, and superfluous opinions."

This is not the only recent example of a short-seller taking aim at a Chinese company. In the days after Chinese search giant Baidu announced plans to acquire a livestreaming service operated by compatriot Joyy for $3.6 billion, Joyy was hit with allegations of accounting fraud.

A report from investment firm Muddy Waters called the service "about 90% fraudulent" and "an ecosystem of mirages." Joyy issued a rebuttal, but similar reports from Muddy Waters preceded the discovery of actual fraud at Chinese cafe operator Luckin Coffee and online education company TAL Education Group.

If the livestreamer's finances are confirmed to be fraudulent, Baidu "will probably stop the acquisition," a source in the industry said.

Baidu is seen as one of China's big three tech companies, alongside Alibaba Group Holding and Tencent Holdings, but its market capitalization is less than 10% of Alibaba's or Tencent's. The Joyy report may force the search company to rethink its strategy for catching up.

Meanwhile, with distrust of Chinese businesses growing in Washington, the Securities and Exchange Commission is preparing new rules that would impose tougher scrutiny. A proposed version could be released as early as this month, according to The Wall Street Journal.

The U.S. had allowed Chinese companies to list despite Beijing blocking American regulators from checking their audits, maintaining a double standard for years. But fraud and other accounting issues at companies like Luckin have forced regulators' hand.

Congress has pushed the issue as well. A bipartisan bill passed by the House of Representatives this week would require U.S.-listed foreign businesses to comply with audits by the Public Company Accounting Oversight Board, or else face delisting.

"Communist China is right now using U.S. stock exchanges to exploit American workers and families -- people who put their retirement and college savings in public companies," said Republican Sen. John Kennedy, a cosponsor of the bill, in a news release Wednesday. "U.S. policy is letting China flout rules that American companies play by, and it's dangerous."

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