Deloitte's China Office Says 'No' to SEC Subpoena

If [Deloitte's Shanghai unit] were to defy the [China Securities Regulatory Commission's] command and produce the workpapers directly to the SEC, the severest of sanctions could be imposed on DTTC and its personnel: China regulators would be authorized to dissolve the firm entirely and to seek prison sentences up to life in prison for any DTTC partners and employees who participated in the violation,” the documents said.

Deloitte’s legal team at Sidley Austin LLP asked the court on Wednesday to force the SEC to seek the documents through the Hague Convention. Deloitte’s lawyers also asked the court to toss a previous ruling requiring Deloitte to appear in court and explain why it should not be forced to turn over the documents.

From: http://blogs.wsj.com/corruption-cur...-subpoena-deloitte-says/?mod=google_news_blog

April 12, 2012, 4:54 PM

China Could Jail Employees Over SEC Subpoena, Deloitte Says

By C.M. Matthews

Deloitte & Touche Tohmatsu Ltd. said Wednesday that if the Securities and Exchange Commission forces it to respond a subpoena requesting documents from its Shanghai unit, its employees in China could face jail time and the unit could be dissolved by Chinese authorities.

The documents in question relate to potential accounting fraud by one of Deloitte’s former clients, but the firm’s ongoing legal battle with the SEC carries broader implications for accounting and law firms with operations in China.

If the court rules in favor of Deloitte, it could curtail the ability of the commission to gather evidence in China. If the SEC prevails, firms could be forced to choose between crossing U.S. regulators or Chinese authorities, a point hammered home in court papers filed by Deloitte Wednesday.

“If [Deloitte's Shanghai unit] were to defy the [China Securities Regulatory Commission's] command and produce the workpapers directly to the SEC, the severest of sanctions could be imposed on DTTC and its personnel: China regulators would be authorized to dissolve the firm entirely and to seek prison sentences up to life in prison for any DTTC partners and employees who participated in the violation,” the documents said.

Deloitte’s legal team at Sidley Austin LLP asked the court on Wednesday to force the SEC to seek the documents through the Hague Convention. Deloitte’s lawyers also asked the court to toss a previous ruling requiring Deloitte to appear in court and explain why it should not be forced to turn over the documents.

An SEC spokeswoman declined to comment.

In September, the SEC asked the U.S. District Court in Washington, D.C., to enforce a subpoena it sent Deloitte asking for information from its Shanghai unit’s audits of Longtop Financial Technologies Ltd., a Cayman Islands company with principal offices in China.

The SEC began investigating Longtop, which went public on the New York Stock Exchange in 2007, for accounting fraud in May after Deloitte’s Chinese unit resigned as its auditor because of problems verifying the company’s financial statements. But Deloitte refused to respond to the SEC’s subpoena, saying the information was protected by China’s state secret laws.

Auditors, companies and lawyers say they have been grappling with the headache of what exactly constitutes a Chinese “state secret” for months. Indeed , in a country where the lines between private and state-owned enterprises are blurred, the government can claim almost any piece of information as a state secret.

But the SEC argued that Deloitte raised that argument broadly without pointing specifically to what’s covered under the secrecy laws and should not be exempted from the subpoena without showing cause.

On Wednesday, Deloitte said the SEC did not have the right to subpoena the documents because they are located abroad. While Congress did grant the SEC new authority under the Dodd-Frank financial reform package to seek documents abroad, Deloitte said, it also allowed foreign accounting firms to produce documents to their home regulators—”where direct production to the SEC would violate a foreign country’s laws.” This is just such an occasion, Deloitte said.

According to Deloitte, Chinese authorities explicitly told its Shanghai unit in June 2011 that they “did not consent to the production of the Longtop workpapers directly to the SEC.” At a meeting in October, Chinese officials warned Deloitte and other accounting firms that any requests for documents by foreign regulators must be done “through the mechanism of mutual cooperation of the regulators of the respective countries.” If not, the accounting firms would be held responsible, the officials said.

A spokeswoman for Deloitte said that the firm was told that U.S. and Chinese regulators have been in discussions to try to work out an accommodation on broader issues of cross-border cooperation. “We hope that such a resolution will be forthcoming,” she said.