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China-based financial software house, Longtop Financial Technologies, is accused by two research firms of defrauding shareholders, over-reporting revenues and lacking transparency in its acquisition practice, among other things. The vendor denies any wrongdoing and brands the allegations ‘absolutely false’.

Longtop Financial TechnologiesChina-based financial software house, Longtop Financial Technologies, has been accused by a research entity, Citron Research, of providing fraudulent statements to its shareholders, over-reporting revenues, failing to disclose past alleged misdeeds by chairman Xiaogong Jia and CEO Weizhou Lian, and engaging in off-balance sheet transactions. Citron pounced on Longtop’s ‘unconventional staffing model’, and gifts of stock made by Jia to employees and friends.

The report caused a significant dip in the company’s share price (34 per cent). In response, the vendor has held a conference call defending its position and refuting ‘the absolutely false allegations of fraud and other alleged wrongdoings’ made by Citron. Derek Palaschuk, now Longtop’s former CFO, said the report ‘insults the intelligence of its readers’. He stated that Longtop is a ‘well-managed’ company that is fully and properly audited by Deloitte. Furthermore, Palaschuk’s relationship with Deloitte was the ‘most important relation that I have other than with my family and my CEO’. He was confident that Deloitte fully backs Longtop: ‘the best evidence of our auditor’s support is when they signed a 20-F [financial statement submitted to the US Securities and Exchange Commission, SEC], which will be filed in July 2011.’ However, Deloitte resigned as the vendor’s auditor shortly after the conference was held. Furthermore, Longtop delayed releasing its Q4 results and later said it could not predict when its annual report would be filed with the SEC.

There have been a number of attacks on the company over the last year and such ‘rumours and allegations, which are repeated almost verbatim in the Citron reports, have become predictable in their timing’, said Palaschuk. ‘They always fall in our quiet periods leading up to our earnings announcements.’ He added that Longtop has ‘a very strong case’ for taking legal action against Citron and it is assessing potential options. Its shares have subsequently climbed back up in value.
Derek Palaschuk, Longtop Financial TechnologiesPalaschuk has also praised Jia whom he described as ‘a very rare person’ who is not motivated by money. This, he argued, explained Jia’s giving away $80 million in stock to his employees, a move questioned by Citron. ‘Having a lot of money is not important to him,’ stated Palaschuk. ‘He is also frugal. Even though he is over 60 years old and has wealth well in excess of $100 million, he and his wife still travel economy class when they go to the United States.’

Meanwhile, Citron continues to dig deeper, particularly into its investigation that Xiamen Longtop Human Resources (XLHRS), the third-party HR agency for the majority of Longtop’s technical and professional staff, was not an unrelated party, as claimed by Longtop.  

It has now published a document that it claims proves the relation between the two entities. It asks whether it is believable that XLHRS is an unrelated party, given it is located in the vendor’s premises and has Longtop as its only client, ‘used the same email servers and had staff from Longtop’s legal department personnel sign their administrative filings with the government’. Citron also brings up a discrepancy between its estimates of XLHRS’s revenue according to Longtop’s 20-F and the State Administration of Industry and Commerce (SAIC) documents filed by XLHRS. According to 20-F, the HR company is to receive a service fee ‘for salary + bonus + social insurance + other expense for the entire year’ for the Longtop employees it handles, which Citron values, ‘on a conservative basis’, at CNY400-500 million ($62-77 million) in total. Meanwhile, the SAIC filings, which are audited by a local accounting firm, list a figure of ‘merely’ CNY$5.1 million ($785,000), Citron states.

Shortly after Citron’s announcement, another research and consulting firm, OLP Global, also issued a report which voices similar allegations, in addition to raising a question about Longtop’s acquisition practice. OLP Global’s research of 20 acquisitions raised ‘several red flags’, it said in the report, as the majority of these entities ‘appeared to be unprofitable, with outsized operating expenses’. Ownership issues have also been raised by the research firm, as well as ‘opaque disclosures that make it impossible for investors to independently verify a number of transactions’. In response, Longtop has issued a lengthy statement rebutting these allegations and describing itself as ‘a target of efforts to attack the integrity of its business and its financial statements’ as the announcement of its annual financial performance draws closer.

Meanwhile, Palaschuk has resigned from his position of independent director of another Chinese company, Renren (a social networking entity), which is about to launch an IPO. Palaschuk chaired Renren’s audit committee. Shortly afterwards, he handed in his resignation from Longtop. The SEC has begun an inquiry into the vendor’s financial statements.


Unlike some ‘news’ sites, IBS Intelligence never copies press releases. This article has been written by our independent reporters to provide a concise, researched story that gets straight to the point.

 

by Darshana Adanwale
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