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Listing Council Decisions
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Identification Number
1087
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Public Interest
Rule 5101: Nasdaq 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.
Issue: Should the Company be granted an extension to remain listed on
Nasdaq, notwithstanding a Panel decision that affirmed Staff's determination to
delist the Company based on public interest concerns Staff identified in a recent press release and subsequent Company disclosures, which include: (1) a liquidity crisis, and a related line of credit from an entity controlled
by Company employees; (2) recent management turnover and the reasons for management resignations; (3) corporate structuring that precludes transfer of cash or other assets from the Company's Chinese subsidiaries to the Company; (4) the Company's past association
with a stock promoter with a regulatory history, and trading activity in the Company's stock by certain brokers, significant shareholders and the former CEO?
Determination: Affirm the decision to
delist the company.
Fundamental to the Company's argument is its assertion that Staff applied its own business judgment in determining to
delist the Company and as such the determination, and the Panel decision, was ultra
vires. This argument is without merit. There is no evidence that Staff acted outside of the scope of authority provided by either Rule 4120(a)(5) or Rule 5101. Rule 4120(a)(5) permits
Nasdaq to halt a listed security when it requests information from the issuer relating to material news, its ability to meet
Nasdaq listing qualification requirements, or any other information which is necessary to protect investors and the public interest. The Listing Council finds that Staff had satisfied the requirements of Rule 4120(a)(5)
as a recent press release did represent material news. Moreover, there is no dispute that the disclosure raised questions concerning the Company's ability to meet
Nasdaq's listing standards given the significant resignations, announcement of the retention of a restructuring adviser, and the entry into the revolving loan agreement to meet the Company's “immediate cash needs.”
Turning to the exercise of its discretionary authority under Rule 5101, the Company's determination to allow a $33 million cash balance to decrease to approximately $25,000 over the course of 14 months without a means to adequately fund the Company's operations
is very concerning to Nasdaq and a valid basis to exercise its discretionary authority under Rule 5101 to
delist the Company. The Listing Council agrees with Staff's position that bringing the Company to the brink of insolvency by spending down corporate assets to this level is not an ordinary event, but rather irresponsible,
reckless and inconsistent with conduct expected of a
Nasdaq- listed company. In addition, the Company was slow to react to its liquidity crisis, as there is adequate evidence in the record to conclude that it knew of its liquidity issues several months before it secured the related party revolving loan,
in contrast to the Company's assertion that there were no other alternatives due to a lack of time. While remedial steps were taken by the Company, it is unclear that such steps will adequately address the issues that gave rise to Staff's
delisting determination. The Company remains unable to assert any material control over its subsidiaries in terms of funding the Company's operations, and receives its operating capital from a revolving loan agreement
with a company controlled by subsidiary executives. In addition, the lack of control of its subsidiaries presents a bevy of concerns, including questions surrounding the Company's internal controls over accounting and other U.S. federal regulatory obligations.
As noted in the record, the new Company executives provided a qualified attestation to the Company's financial reports.
Addressing the Company's assertion that the
delisting is not in the public interest, the Commission has long recognized that
Nasdaq is vested with discretionary authority to deny an issuer's request that its securities be included in
Nasdaq, and holds that
Nasdaq's primary concern in making listing determinations should be the protection of prospective investors. In
Tassaway, the SEC stated that “while exclusion from
Nasdaq may hurt existing shareholders, the primary emphasis must be placed on the interest of prospective public investors and that this latter group is entitled to assume that the securities in [Nasdaq]
meet [its] standards.” It is against this regulatory backdrop that the Listing Council finds that it was appropriate to deny continued listing to a company that (1) allowed a $33 million cash balance to decrease to approximately $25,000 over the course of
14 months without a means to adequately fund the Company's operations; (2) chose to rely on funding from employees of its Chinese subsidiaries to avoid insolvency, with no apparent consideration of other sources; (3) experienced significant management turnover;
(4) has a lack of contractual arrangements with its Chinese subsidiaries that allow for the transfer of funds from China to the U.S. for business expenses.
Although the Company's ties to a stock promoter with a regulatory history and his affiliates continued during the time that the Company took the actions at issue in this matter through the initiation of the appeal to the Listing Council, it appears that
the Company has taken action to sever such ties at this time. Moreover, as the Panel noted, the Company has taken some steps to resolve some of the issues that have raised Staff's concerns. Nonetheless, the Listing Council does not believe that the Company
should be listed on Nasdaq at this time. The issues arising from the recent press release and Staff's subsequent investigation are very concerning, and are representative of a Company clearly not prepared for the rigors
and responsibilities that are demanded of listed companies. As such, it is consistent with the discretion afforded under 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.
Accordingly, the Listing Council affirms the Panel decision to deny continued listing to the Company based on the exercise of the broad discretionary authority under Rule 5101.
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Publication Date*:
8/21/2013
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Identification Number:
1087
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