House poised to cut rogue Chinese firms off from American investors

Fraudulent listings on US exchanges have cost investors hundreds of billions of dollars over past decade

The House of Representatives will vote Wednesday on a bill aimed at boosting oversight of companies from China and elsewhere that are listed on U.S. stock exchanges.

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Such firms are not required to adhere to the same investor protection rules, including audit requirements, as U.S. companies, a disparity highlighted by the fraud allegations at China-based Luckin Coffee this year.

The Holding Foreign Companies Accountable Act, introduced by Sens. John Kennedy, R-La., and Chris Van Hollen, D-Md., would, if signed into law by President Trump, tighten the rules for such companies, forcing them to undergo an audit from the Public Company Accounting Oversight Board. Those failing to do so each year over a three-year period would be delisted.

"Publicly listed Chinese companies should not be exempt from the rules that apply to all other businesses and our bill establishes an even playing field for all," said Van Hollen in a statement.

“The current policy that allows Chinese firms to flout the rules that American companies follow is toxic," Kennedy told FOX Business in a statement. "It puts American families and workers at risk by jeopardizing their college and retirement savings."

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Wednesday’s vote, which is expected to pass the House, comes more than six months after the bill was passed by unanimous consent in the Senate.

“It’s a good first step,” Wolfpack Research founder Dan David told FOX Business. “But it is really only a first step. And in no way is it a complete protection or the kind of protection you would have of a US-based U.S.-listed company."

Fraudulent listings on U.S. exchanges have cost investors hundreds of billions of dollars over the past decade. There were 217 Chinese companies listed on the U.S.’ three largest exchanges worth $2.2 trillion as of Oct. 2, 2020, according to the U.S.-China Economic and Security Review Commission.

The Xiamen, China-based Luckin Coffee was in May ordered to delist from the Nasdaq after an internal investigation found the company’s chief operating officer and other employees reported fraudulent sales figures. The internal investigation followed a U.S. Securities and Exchange Commission inquiry.

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Luckin raised $561 million through an initial public offering on the Nasdaq in May 2019 and an additional $865 million through two separate fundraising moves in January.

Luckin wasn’t the only Chinese company to be investigated by the SEC this year.

Education software provider GSX Techedu found itself at the center of an SEC inquiry in September after short-sellers accused the company of faking sales. That came less than three weeks after Netflix-like streaming service iQiyi said it was being examined by the SEC after David accused the company of inflating revenue by as much as 44%. Investigations into both companies remain ongoing.

Wednesday’s vote comes as lawmakers continue to look for ways to hold China accountable for its handling of the COVID-19 pandemic.

The White House in May ordered the Federal Retirement Thrift Investment Board, a government retirement fund, to divest $4 billion of equity holdings in Chinese companies. Investment bankers and academics have argued the U.S. would face repercussions from China.

Among the concerns are that Chinese companies would take their business overseas to places like Hong Kong or London.

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David says that until there is criminal reciprocity Chinese companies will continue to take advantage of U.S. investors.

“It's often a badge of honor for them to say, ‘I stole from U.S. investors and now I'm going to go put my cousin in charge in name only of a company and do it again,’” David said.