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Sen. Casey: Cayman Island shells, subsidies unfair to U.S. rivals

| Thursday, Dec. 15, 2011

Sen. Bob Casey Jr. has asked the Securities and Exchange Commission to investigate how major Chinese solar panel makers were able to raise billions of dollars by accessing American capital markets.

In a letter on Wednesday to SEC Chairwoman Mary Schapiro, the Scranton Democrat cited a Tribune-Review investigation on Sunday that reported seven Chinese solar firms set up Cayman Islands shell companies so they could be listed on the New York and Nasdaq stock exchanges.

Referring to the Trib report, Casey noted that after raising money through American exchanges, China heavily subsidized the companies, creating a drastic oversupply of panels that "severely impacted" the well-being of American solar firms.

"This gives them an unfair advantage for their companies that our companies don't have," the senator told the Trib in a phone interview.

Casey was joined in his criticism by Rep. Cliff Stearns, R-Fla., chairman of the House Energy & Commerce subcommittee on oversight and a severe critic of the Obama administration's handling of a $535 million federal loan guarantee to American solar company Solyndra Inc., which closed this year.

In an e-mail to the Trib, Stearns blasted China as "an international pariah" that uses the Cayman Islands structure so that its "companies traded on the New York Stock Exchange can hide behind Chinese laws that prevent them from being held accountable for securities violations." He said China's subsidies for its solar panel industry are "an unfair practice that undermines the competitiveness of our domestic industry."

In other action yesterday, an SEC administrative law judge suspended trading and revoked the securities of a Chinese software company registered in the Caymans, Longtop Financial Technologies Ltd. The NYSE delisted the company's stock in August. The ruling resulted from the refusal by Longtop and its auditor to disclose key financial documents to U.S. supporting investigators, citing Chinese confidentiality laws.

It was not immediately clear what the judge's decision could portend for solar panel makers and other Cayman-Chinese companies that trade on American exchanges. Longtop can appeal the decision to the SEC.

Longtop formed in 2007, shortly after six of the seven companies that comprise the heart of the Chinese solar industry registered in the Caymans. Goldman Sachs, one of the world's largest investment banks, financially backed Longtop's formation and was an original underwriter of Chinese solar panel makers Hanwha SolarOne and Yingli Green Energy, the Trib found.

Casey wrote that China's actions impacted the value of shares in the Chinese companies that Americans eagerly bought.

As the oversupply of panels drove down prices and cut into profit margins, the Trib reported that some shares once worth in the $80 range were trading for less than $3.

"While the trade angle is essential to protecting our domestic industry, we must also protect our investors," Casey told the SEC.

The problem is not that companies formed in the Cayman Islands are necessarily risky but that when their main assets are really in China, "U.S. investors cannot properly vet their investments," Casey wrote.

Chinese law does not allow China-based auditing firms to divulge the working papers that form the basis of the financial books of Chinese companies.

That was the case in a class-action lawsuit brought in California against one of the Cayman-Chinese solar panel firms. LDK Solar Co. Ltd., formed in the Caymans in 2006 and then traded on the New York Stock Exchange, sparked investor ire after a top insider complained of irregularities in financial reports.

When word leaked in 2007, the stock plunged and investors sued. They settled the lawsuit for a fraction of the original claim after LDK's Chinese auditor, KPMG Huazhen, said it was not able to produce details "due to the applicable law and regulations of the People's Republic of China."

The case is similar to the Longtop Financial case, in which auditor Deloitte Touche Tohmatsu of Shanghai declined to hand over papers to the SEC in connection with a fraud accusation, citing Chinese law.

In the Longtop case, the SEC fought to obtain yesterday's ruling. After the dispute arose this year, the stock exchange delisted Longtop's shares, but they continued to trade in the over-the-counter American market. The firm's stock closed on Tuesday at $0.03 a share, down from a 52-week high of $37.42.

Casey asked the SEC to look at all Chinese companies that set up shells in the Cayman Islands to gain access to American capital markets.

"Without this [accounting] verification, Chinese firms should not be allowed on U.S. stock exchanges under any circumstances," he wrote.

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