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Senator Casey asks SEC about protection for American investors

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Thursday, July 10, 2014, 11:15 p.m.

American investors face “significant risks” from Chinese Internet companies that use Cayman Island partners to trade on U.S. stock markets, Sen. Bob Casey Jr. said on Thursday.

Casey, D-Scranton, sent a letter to the Securities and Exchange Commission this week asking for details on what the agency is doing to protect Americans from companies using these investment structures. Typically, Chinese companies in protected industries raise money from American investors through offshore intermediaries.

“They get the benefit of our markets, and they get the benefit of the dynamism of our economy,” Casey told the Tribune-Review. “The least that we should do is hold them to the highest possible standard.”

Casey's inquiry follows an investigation by the Trib showing how Americans who invest in some Chinese Internet companies help make it easier for hackers and other criminals to hide their online communications from the FBI.

Chinese law prohibits foreigners from investing directly in Internet companies. So to raise money from American investors, mainland firms — called variable interest entities, or VIEs — form offshore companies in the Cayman Islands to trade on U.S. stock markets.

While the offshore company has contracts with the Chinese operator, it typically has few direct assets. Echoing other experts, Casey warned that these contracts might not be enforceable in Chinese courts.

Casey specifically cited concerns about a proposed initial public offering, or IPO, by Chinese online company Alibaba. Investment analysts have said the Chinese competitor to eBay could have the largest-ever offering in the United States if it goes public later this summer.

An Alibaba spokeswoman declined to comment, citing restrictions caused by the proposed IPO.

The company warns investors in its prospectus that its corporate structure has risks: “These contractual arrangements may not be as effective as direct ownership.”

If a contract dispute comes up, the company says, the offshore partner can pursue the case in court “subject to uncertainties in the (Chinese) legal system.”

Investing in Alibaba is risky, but all investments have some risk, Matthew Turlip, a Wall Street analyst with PrivCo in New York, told the Trib on Thursday.

With VIEs, investors are at the mercy of the mainland company's CEO and the Chinese government, Turlip said. But in the case of Alibaba, at least, the top executive and government have strong incentives to make the relationship work, he said.

“These are things that the American public should be aware of whenever they decide to invest or not invest in Alibaba,” Turlip said. “That said, when you weigh the risks of investing, there is a large amount of upside in an investment in Alibaba.”

The Trib's investigation found that Chinese military officials accused of computer hacking have used free email services provided by companies that receive money from American investors. During investigations of criminal activity, the FBI and other American law enforcement authorities cannot access communications that take place on these offshore Internet services.

Allegations of Chinese military hacking add to the country's history of being a “bad actor,” Casey said.

“It's particularly pernicious,” he said, “because you have the fusion, or the combination, of the Chinese military and Chinese corporate actors coming together to hack into some of the leading companies not only in Pennsylvania but in the world.”

Andrew Conte is a staff writer for Trib Total Media. He can be reached at 412-320-7835 or

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