The Chinese are committing fraud in US capital markets’: Muddy Waters' Carson Block

China-US tensions are spilling over onto Wall Street

The Chinese, already facing heat from American officials over coronavirus disclosures among other issues, may have a new battle to fight on Wall Street over their domestic companies listed on U.S. stock exchanges.

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Carson Block, Founder and Chief Investment Officer of Muddy Waters Capital, is among a group of investors blasting the Chinese for repeated bad form that he believes is harming Main Street investors.

“Chinese-based issuers have committed – and continue to commit – fraud on a stunning scale in the United States’ capital markets,” wrote Block in a comment letter to the Securities and Exchange Commission exclusively obtained by FOX Business ahead of a Thursday ‘Emerging Markets Roundtable’ hosted by the SEC.

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The letter, which will be shared publically on the SEC’s site with others, also states, “Protecting individual investors from the devastating financial impact of these frauds requires a profoundly different policy and regulatory approach.”

Qilai Shen/Bloomberg via Getty Images

Block cites the “implosion at Luckin Coffee in April of this year.” The so-called “Starbucks of China” admitted that at least $310 million of its sales over the previous three quarters had been exaggerated. Earlier this month, Chairman Charles Lu was removed at a special shareholders' meeting in Beijing along with three other directors. But Lu is Luckin’s largest investor so his influence remains of concern to regulators here and in China.

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There have been “no auditor resignations of note” Block points out. Luckin was delisted from the Nasdaq last month.

Even with the Luckin implode, the Nasdaq, which notes it has over 3,100 listings from both mature and developing markets, argues it is taking steps, as recently as May, to close some of these loopholes.

TickerSecurityLastChangeChange %
NDAQNASDAQ OMX GROUP INC124.03+2.73+2.25%

“While Nasdaq’s role is not to regulate or inspect auditors, in light of the limitations placed on the PCAOB [Public Company Oversight Board] and other regulators, we believed that it was incumbent upon us to have a role in qualitatively assessing these accounting firms and proposed rule changes to strengthen investor protection. The Nasdaq rule changes that we proposed to the SEC on May 18, 2020, aim to enhance listing standards applicable to companies whose business is principally administered in a Restrictive Market. These proposed rule changes also address auditor and management qualifications,” wrote John Zecca, Chief Legal and Regulatory Officer, Nasdaq, in his letter to the SEC reviewed by FOX Business.

Secretary of State Mike Pompeo, in June, praised Nasdaq for taking the lead on tightening up regulatory practices.

“As part of this ongoing effort, I applaud Nasdaq for requiring auditing firms to ensure all listed companies comply with international reporting and inspection standards. Nasdaq’s announcement is particularly important given a pattern of fraudulent accounting practices in China-based companies” said Pompeo in a press release.

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This week Pompeo continued to warn the Chinese over consequences for bad behavior, threatening a possible ban of select social media including TikTok.

The roundtable is sure to provide some fireworks as pressure mounts on the Chinese.

SEC Chairman Jay Clayton, who will preside over the meeting, in his statement acknowledges the rapid expansion of emerging market companies, “including China” into U.S. capital markets. “This is a fundamental issue in emerging market investing that I believe investors, particularly our Main Street investors, should better understand.”

TickerSecurityLastChangeChange %
ICEINTERCONTINENTAL EXCHANGE INC.100.56+2.23+2.27%
SBUXSTARBUCKS CORPORATION84.30+1.26+1.52%

On Thursday, representatives from the New York Stock Exchange, the Department of Justice, Starbucks and the PCAOB, among others, will participate in the SEC's roundtable.

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