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Accounting and Chinese IPOs, Nasdaq, EU rules: Compliance

[NEW YORK] US regulators ended a three-year standoff Feb 6 that might have jeopardized the listings of hundreds of China-based companies trading in the US.

The Chinese affiliates of the four largest accounting firms each agreed to pay US$500,000 to resolve Securities and Exchange Commission claims that they blocked investigations of accounting fraud by refusing to hand over documents, the SEC said in a statement. The agency dropped six-month auditing bans as part of the deal.

The accord resolves what became a broader diplomatic row over whether Chinese laws prohibited companies from complying with US regulations. The conflict came to a head as the SEC ramped up probes of accounting fraud at dozens of companies based in China and listed in the US. The audit firms, which had refused to cooperate with investigators, have now provided the SEC with the information it sought.

"As we repeatedly have stated throughout this litigation, obtaining an audit firm's workpapers is critical to enforcement staff's ability adequately to protect investors from the dangers of accounting fraud," said SEC Enforcement Director Andrew Ceresney.

"This settlement recognizes the SEC's substantial recent progress in obtaining those documents from registered firms in China." The firms - Deloitte Touche Tohmatsu CPA, Ernst & Young Hua Ming, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs - may have the six-month bans reinstated against them if they stop cooperating with the SEC, the agency said.

The four audit firms said in a joint statement that the deal doesn't affect their ability to serve their clients.

The SEC filed an action against the auditors in 2012 after struggling for years to obtain information for dozens of accounting-fraud probes. The auditors argued that Chinese law prohibited them from sharing data that might contain state secrets. Over the past 18 months, the SEC has received documents from PwC, Deloitte and Ernst & Young, the agency said.

Nasdaq OMX Group was accused of allowing market makers to make huge prearranged options trades in advance of dividend payments on underlying stock and exchange traded funds in order to increase profits.

An options holder, I Stephen Rabin, sued and said he wants to represent anyone who held short positions on "in the money" call options contracts on dividend-paying stocks and exchange traded funds since Feb 6, 2010, according to a proposed class action filed Feb 5 in Philadelphia federal court.

Market makers, or dealers, conspire with each other to execute large prearranged trades in corresponding short and long options positions, increasing their probability of capturing a "dividend windfall," according to the complaint. The result of the "illicit" scheme is that market makers are fully hedged and have little if any risk, according to the complaint.

Joseph Christinat, a Nasdaq spokesman, declined to immediately comment on the complaint.

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