This post was written by Joan Hon and Veronica Siwang To.
Evidence kicked off last week in the highly anticipated case brought by Hong Kong's Securities and Futures Commission ("SFC") against Ernst & Young Hong Kong ("E&Y") over its failure to adequately respond to statutory requests for information in relation to an SFC investigation of the failed 2009 IPO of Chinese waste management company, Standard Water Limited ("Standard Water").1 A copy of the SFC’s August 2012 originating summons can be found here.
In 2010, the SFC issued formal notices to E&Y seeking the working papers and underlying accounting documents relating to Standard Water’s pre-IPO audit. With respect to several notices, E&Y claimed that it did not possess the relevant records, as they were held in the Mainland by its PRC joint venture partner, Ernst & Young Hua Ming ("Hua Ming"), whose staff was principally involved in the audit. Furthermore, E&Y claimed that PRC law, including China's state secrets and archives law, prohibited it from producing the requested documents.
This case is obviously being closely watched by the Hong Kong accounting community, which frequently comes up against these restrictive Chinese laws, and the Securities and Exchange Commission (“SEC”) has taken up a similar case in the U.S. Unfortunately, not only is a Hong Kong decision not expected to be issued until some time in 2014, but based on the SFC’s emphasis on possession and control, it is possible that such decision would be unlikely to resolve the fundamental conflict between PRC’s restrictive laws governing production of documents and information to foreign regulators and Hong Kong law and the SFC’s statutory power to require parties to produce information.
For a more detailed analysis, click here to read the issued Client Alert.
1 E&Y withdrew its engagement from Standard Water after finding certain undisclosed inconsistencies.