Deloitte sued over audits of ChinaCast Education

A group of U.S. investment funds has sued the Chinese and U.S. affiliates of Deloitte Touche Tohmatsu, blaming them for investor losses at troubled ChinaCast Education Corp.

The funds are seeking to recover tens of millions of dollars of investment losses from Deloitte, which audited the Chinese company's financial statements. The lawsuit was filed in U.S. District Court in Manhattan.

ChinaCast, which provides post-secondary education and e-learning in China, sold shares in the United States on the Nasdaq stock exchange. It was delisted last year for failing to file its 2011 annual report.

The company has been under pressure since ousting former chief executive Ron Chan last year. ChinaCast said at the time that it had uncovered questionable activities and transactions involving Chan that "raise the specter of possible illegal conduct."

Chan could not be reached for comment on Tuesday. In a statement to shareholders last year, he denied allegations of wrongdoing.

ChinaCast assets were transferred to an entity owned by Chan, "a brazen looting" that Deloitte failed to detect, according to the plaintiffs' complaint, which was dated Friday.

"Deloitte put its name and brand behind the certification of financial statements that were almost entirely false," the complaint said.

Deloitte, the world's second-largest accounting and consulting firm, has run into problems with several audits of its China-based clients listing on U.S. exchanges.

A Deloitte spokesman could not immediately be reached for comment.

Deloitte's Shanghai-based affiliate audited ChinaCast's annual reports for the years 2007 until 2010, according to the complaint. The complaint said Deloitte & Touche LLP, the U.S. audit firm, controlled the audit of ChinaCast's financials because one of its partners was a key audit team member for issues involving compliance with U.S. accounting standards.

The plaintiffs include Fir Tree Value Master Fund LP, Columbia Pacific Opportunity Fund LP, Lake Union Capital Fund LP and Ashford Capital Management Inc.

Last May, Deloitte was charged by the U.S. Securities and Exchange Commission on allegations it failed to turn over documents related to its audit of Longtop Financial Technologies Ltd, a China-based software company under investigation for accounting fraud. Deloitte has said that China's state secrets law prevents it from turning over documents.

Investors have suffered massive losses since 2010 because of a string of accounting scandals at China-based companies, but the SEC has struggled to take action because it is often unable to get evidence out of China.

The case is Special Situations Fund III QP et al vs Deloitte Touche Tohmatsu CPA Ltd, U.S. District Court, Southern District of New York, No 13-1094.