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  Listing Council Decision 2011-7
Identification Number 1036
Rule 5101: NASDAQ is entrusted with the authority to preserve and strengthen the quality of and public confidence in its market.  NASDAQ stands for integrity and ethical business practices in order to enhance investor confidence, thereby contributing to the financial health of the economy and supporting the capital formation process. NASDAQ Companies, from new public Companies to Companies of international stature, are publicly recognized as sharing these important objectives. NASDAQ, therefore, in addition to applying the enumerated criteria set forth in the Listing Rule 5000 Series, has broad discretionary authority over the initial and continued listing of securities in NASDAQ in order to maintain the quality of and public confidence in its market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. NASDAQ may use such discretion to deny initial listing, apply additional or more stringent criteria for the initial or continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes initial or continued listing of the securities on NASDAQ inadvisable or unwarranted in the opinion of NASDAQ, even though the securities meet all enumerated criteria for initial or continued listing on NASDAQ. In all circumstances where the Listing Qualifications Department (as defined in Listing Rule 5805) exercises its authority under Listing Rule 5101, the Listing Qualifications Department shall issue a Staff Delisting Determination under Listing Rule 5810(c)(1), and in all circumstances where an Adjudicatory Body (as defined in Listing Rule 5805) exercises such authority, the use of the authority shall be described in the written decision of the Adjudicatory Body.
Issue: The company was delisted by a Hearings Panel for public interest concerns, noting that the findings of an independent report of the company’s audit committee form the basis of its determination.  The report described multiple concerns, which included gradual cooperation with the investigation, false and misleading statements made by Company management to the former auditor and the investigatory team, related party dealings, likely violations of the Foreign Corrupt Practices Act, and a lack of adequate disclosure.  For example, the report noted that the CFO had misrepresented the balances and transactions occurring in an off-the-books cash account, one of which include false statements to the investigatory team concerning off-balance sheet accounts. When confronted with evidence of his misrepresentation, the CFO admitted to withholding the details of that account from the public auditor and from the investigatory team. In another instance noted in the report, RMB 21 million was transferred into the personal account of the company’s Accounting Manager with no collateral or written agreement, which “appears to violate the PRC foreign exchange control regulations (SAFE) and is a matter of grave concern given the company’s decision to transfer a significant sum to an employee of the company with no documentation or security.”  The report made six recommendations, including a recommendation that the board of directorsors examine the responsibilities and duties of the CFO.
In its decision to delist the company, the Hearings Panel  cited the extent and nature of serious accounting issues uncovered by the investigation, which were greater and more extensive than had appeared evident at the time of the Hearings Panel  hearing, and include flagrant fraudulent behavior by management, including the CEO, who remains in his position.  Further, the Hearings Panel noted that it believed the changes that would be necessary to enable the company to meet the regulatory standards of listed companies are so fundamental and far-reaching that the process is likely to take significant time.  Moreover, the Hearings Panel stated that the company abused the trust of its shareholders and made misleading representations to Staff, the Hearings Panel, its auditors, and Audit Committee’s investigative team during the course of this delisting process and the investigation, and provided examples thereof in its decision.  The company appealed the decision to the Listing Council.
Determination: Affirmed. After a review of the record in this matter, the Listing Council affirms the Hearings Panel decision. The Listing Council applauds the recent efforts that the company has taken to remediate the serious issues identified by its public accounting firm and further detailed in the report, yet there remain additional measures that must be completed. The Listing Council believes that the company is not appropriate for a NASDAQ listing at this time. The issues identified in the report are very concerning, and are representative of a company clearly not prepared for the rigors and responsibilities that are demanded of listed companies. The report identifies numerous violations of law as well as dishonesty on the part of management. In its arguments before the Listing Council, it is clear the company fundamentally confuses the reason for taking the remedial steps to address the findings of the report. The remedial steps that the company has taken, and commits to take, are not done for the purpose of securing a continued listing on NASDAQ, but rather to make it a better corporate citizen. The success of such efforts in this regard is something than can only be demonstrated over time.
The company does not have an inalienable right to be listed on NASDAQ.  NASDAQ is charged with the protection of investors.  A listing on NASDAQ is a privilege earned by companies that are able to demonstrate not only quantitative wherewithal, but also stringent qualitative characteristics required of all listed companies.  Rule 5101 provides NASDAQ with “broad discretionary authority” over the listing of securities on NASDAQ “in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and to protect investors and the public interest.”  This authority stems directly from NASDAQ’s delegated responsibilities under the Securities Exchange Act of 1934.  Rule 5101 is not invoked lightly and, in instances in which a public interest concern is identified, the issues are very serious.  In the present case, while remedial steps were taken by the company, it is unclear that such steps will adequately address the company’s apparent culture of non-compliance with U.S. and PRC laws and regulations, so that the company is able to adequately fulfill its responsibilities as a listed public company. As such, it is consistent with the discretion afforded under Listing Rule 5101 to delist the company to protect investors while allowing the company to demonstrate over time its ability to act as a responsible corporate citizen.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 1036
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