U.S.Court Fight May not Solve Chinese Accounting Mess（Excerpts）

• Author: Dena Aubin

U.S. regulators appear to be on strong footing in a legal battle over a Chinese auditor's work papers, though their ability to act may have limits and a victory in court may not resolve a widening international accounting mess.

At issue are attempts by the U.S. Securities and Exchange Commission to investigate possible fraud at Longtop Financial Technologies Ltd, one of dozens of U.S.-listed companies based in China that have been caught up in accounting scandals.

The SEC raised the ante last week by seeking a federal court order to force the Shanghai arm of accounting giant Deloitte to turn over its work papers on Longtop. Deloitte has resisted, saying Chinese law prohibits it from turning over documents to foreign regulators.

"Uniformly, the courts have enforced SEC subpoenas because the SEC has such extraordinarily broad subpoena power in its enabling statutes," said Duke University securities law professor James Cox.

That power can reach beyond U.S. borders in such cases as this one, since Longtop's shares trade in the United States. Yet even if the SEC wins in court, the case will come down to whether the Chinese authorities cooperate in seeing the court order honored, legal experts said.

U.S. powers to enforce the order are limited. "You are not sending the U.S. Marshals over to China to enforce this," said Adam Pritchard, a professor at the University of Michigan Law School who specializes in securities law.

Lawyers representing investors who have lost billions of dollars on investments in China-based companies have long complained that their cases have been thwarted by trouble gathering crucial evidence from foreign audit firms.

Auditors have resisted turning over documents, fearing repercussions for violating China's state secrets laws.

The U.S. auditor watchdog, the Public Company Accounting Oversight Board, has been frustrated also in attempts to inspect auditors in China despite meetings with Chinese authorities to search for common ground.

I think they (Chinese authorities) are less concerned with whether they make the SEC happy, but they do need to make investors comfortable that the quality and extent of audits and financial reports meets the needs of those investors.

"I would expect that competing regulatory agencies need to find a protocol to work these things out, and that domestic courts are not going to be an effective tool in that process," said Jim Feltman, national co-leader of litigation, investigative and...