Overview

Robert Khuzami, director of enforcement at the Securities and Exchange Commission, recently let slip in an interview that the US Department of Justice is actively engaged in investigating the accounting practices of Chinese companies listed on US stock exchanges.

This comment raises the possibility that the DOJ may be considering bringing criminal charges against some of these China-based companies, their officers or their directors.

But the DOJ faces formidable procedural and jurisdictional challenges in actually prosecuting an action against entities or individuals located in China, as the Securities Exchange Commission is now learning.

Since the beginning of 2010, the SEC, NYSE and NASDAQ have suspended trading, halted trading or delisted the securities of at least 29 US-listed Chinese companies when significant questions arose regarding the accuracy of those companies’ financial reporting. The SEC Division of Enforcement currently is investigating many of these companies.

However, the SEC has encountered numerous procedural and jurisdictional hurdles endemic to litigating in China, and, despite more than a year of investigations, has yet to initiate a single enforcement action.