Late audits halt in Morgan Stanley-backed stock trading
The University of Michigan endowment is unlikely to see any significant loss from a troubled Asian investment fund that contains two Chinese companies whose shares have been frozen.
The two companies are part of a prominent $1.4 billion Asia investment fund managed by New York banking giant Morgan Stanley. The Chinese firms unexpectedly told securities regulators they will not file their financial statements on time and froze trading in their stocks, actions generally considered to be cause for concern.
The fund’s American investors include the University of Michigan’s endowment, the Oregon public employees’ retirement fund and a foundation supporting Appalachian children at risk. While U-M’s endowment might face some loss if the fund collapses, it’s unlikely to be at any great risk. The endowment is nearly seven times the size of the entire Asian fund in question as of June, at $9.7 billion, and is invested in a diverse group of holdings.
The endowment is the eighth largest of any such college funds in the United States, and actually consists of of about 8,500 separate endowments, according to the university. It distributes a maximum of 4.5 percent of assets each year.
The publicly traded companies, Tianhe Chemicals Group Ltd. and Sihuan Pharmaceutical Holdings Group Ltd., separately announced late last week that they would be unable to meet Hong Kong Stock Exchange deadlines because auditors have not yet signed off on their financials. Both companies pledged to cooperate with the auditors.
Tianhe and Sihuan are valued at $3.7 billion and $6 billion, respectively. They are among 16 companies that comprise a private equity fund managed by Morgan Stanley & Co. LLC, known as Morgan Stanley Private Equity Asia Three, or MSPEA III. An Australian and an Indian company owned by that fund have already failed amid criminal and civil fraud allegations.
A spokesman for Morgan Stanley, Nick Footitt, declined to comment on the missed filings. A Tianhe spokeswoman also declined comment. Sihuan responded to some questions in an emailed statement but said only that the auditors needed more time and that the company was operating as usual.
The twin filing delays raise uncomfortable questions for Morgan Stanley, which picked the companies from obscurity then promoted them as multibillion-dollar growth stories.
“This is not something an auditing firm would do lightly,” said Paul Gillis, a former Partner for PricewaterhouseCoopers LLP in China who now teaches accounting at Peking University. “There are only two reasonable explanations for being late. One is management incompetence. Two is they’re fighting with the auditors. And neither one of those is good.”
Tianhe and Sihuan could eventually receive a clean bill of health, although announcements about earnings delays due to unfinished audits are generally regarded as portending bad news. Any material problems that led to the delay would have to be disclosed once the companies file their financials.
As U.S. investors increasingly consider Chinese stocks, they rely on investment banks like Morgan Stanley to keep troubled Chinese companies from reaching the market.
Morgan Stanley’s private equity team has promised investors it would perform rigorous due diligence and take stakes only in companies where it could exert influence or control. As part of its investments in the two companies, the same Morgan Stanley executive director, Homer Sun, received a seat on each company’s board.
Tianhe Chemicals, the largest investment in the Morgan Stanley fund, was the subject of an investigation by The Associated Press last year and already had its stock frozen last year amid allegations that the company overstated the scale and sophistication of its business.
Sihuan describes itself as one of the largest producers of drugs sold to Chinese hospitals. It announced in October that it was collaborating with the Chinese military on a new Ebola drug treatment called jk-05. But a scientist for the World Health Organization, Martin Friede, told the AP that the company has declined WHO’s repeated requests to provide information about the molecular structure of the drug. The World Health Organization coordinates clinical trials on Ebola drugs, and Friede described sharing such information as standard procedure.
“I would imagine that if it was really novel, and if there was really good information, they would want to share it,” Friede told the AP. “So, connect the dots.”
Sihuan did not say why it had not provided information about the drug to the WHO. A spokeswoman said the drug is “a new molecular entity based on Favipiravir,” an existing experimental Ebola drug created by Japan’s Fujifilm Holdings Corp. Sihuan has filed for a patent on its improved version of the drug that it expects can be administered orally or via injection, the spokeswoman said.
China’s Center for Disease Control told the WHO that the Chinese drug is identical to Favipiravir, Friede said.
Fujifilm Holdings spokesman Kana Matsumoto told the AP that his company also questioned whether Sihuan’s drug was new.
“We have already notified the Chinese Embassy that Avigan (another name for Favipiravir) is protected by a substance patent, application patent and process patent in China,” he said.
Tianhe was the subject of significant public scrutiny over its financials. In September, a shadowy group tied to speculators betting against Tianhe’s stock published allegations that the company had overstated its business in a Morgan Stanley-led public offering just a few months earlier.
An AP investigation corroborated many discrepancies. Tianhe said records cited by AP were outdated and disputed other findings. But the controversy drew public notice from its auditor, Deloitte Touche Tohmatsu Ltd., which Gillis said would have been expected to put extra emphasis on its next audit process.
“The auditors have had plenty of time to look into the allegations and dismiss them,” Gillis said. “In this case, everybody would have been paying attention.”