E&Y “State Secrets” Case Kicks Off in Hong Kong – But a Long Way to Go

by Reed Smith
Contact

Evidence kicked off last week on March 27-28, 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 nine 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.

When Hua Ming still failed to produce documents in spite of the SFC’s request for assistance from the China Securities Regulatory Commission (“CSRC”), the SFC turned to Hong Kong’s High Court to inquire into the circumstances of E&Y’s non-compliance. If satisfied of no reasonable excuse for said non-compliance, the Court has the power to compel production.

In opening submissions, E&Y argued that firstly, E&Y did not have access to Hua Ming’s documents, and secondly, that Chinese law specifically requires that the SFC make its request for documents to the CSRC, who would in turn request Hua Ming to produce the documents. Notwithstanding the SFC’s allegation that it has already done so, E&Y asserted that Hua Ming has expressed willingness to cooperate with any such CSRC request.

During cross-examination of E&Y’s singular fact witness, Mr. Alden Leung, an E&Y partner and its Greater China Quality and Risk Management Leader, the SFC tested E&Y’s assertion that it was not in possession of or had access to any working papers. The SFC also focused on what were characterized as misleading or evasive answers made by E&Y in response to other questions in the SFC notices. E&Y objected to such questioning, arguing that the SFC’s originating summons failed to give notice of this particular inquiry, and that it believed that these proceedings only concerned the failure to produce Hua Ming’s working papers. However, it was clear that Mr. Justice Peter Ng Ka-fai was not satisfied with Mr. Leung’s inability to provide meaningful answers to the SFC’s questions.

Cross-examination could not be completed and has been adjourned to May 16, 2013. Additionally, PRC law experts are to be examined for two days to be fixed thereafter. Based on the two hotly demanded barristers’ diaries, expert evidence is unlikely to commence earlier than October of this year.

This case is obviously being closely watched by the Hong Kong accounting community, which frequently comes up against restrictive Chinese laws restraining the production of documents, and the Securities and Exchange Commission (“SEC”) has taken up a similar case in the U.S. Unfortunately, not only are the Hong Kong proceedings expected to take significant time, 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.


1 E&Y withdrew its engagement from Standard Water after finding certain undisclosed inconsistencies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

Written by:

Reed Smith
Contact
more
less

Reed Smith on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!