Receiver Gains Control of Some Assets of China’s ZST; Case Is Test of Investors’ Ability to Recoup Losses in Wake of Accounting Questions

May 3, 2013, 1:25 p.m. ET

Receiver Gains Control of Some Assets of China’s ZST

Case Is Test of Investors’ Ability to Recoup Losses in Wake of Accounting Questions

By MICHAEL RAPOPORT

The court-appointed receiver empowered to seize the assets of a U.S.-traded Chinese company facing accounting questions has chalked up his first successes.

The receiver, Robert Seiden, says he has obtained control over subsidiaries of the Chinese company, ZST Digital Networks Inc., ZSTN +13.33% in the British Virgin Islands and Hong Kong. He also has gained control of a ZST Digital bank account in Hong Kong, and is in the process of doing the same with ZST Digital bank accounts in China.

Mr. Seiden has been tasked with seizing and selling ZST Digital assets as part of a court’s novel remedy for a U.S. investor locked in a legal dispute with the network-equipment maker. The high-profile case may test the extent to which U.S. investors can recover losses from Chinese companies whose shares drop in the wake of accounting or disclosure problems.In addition to the asset seizures, earlier this week Mr. Seiden—armed with an order from a New York federal judge—seized records from the New York offices of Crowe Horwath International, a global network of accounting firms whose Hong Kong affiliate is ZST Digital’s independent auditor. That follows two similar seizures Mr. Seiden made last month at the New York City home of Henry Ngan, ZST Digital’s chief financial officer, and offices of Taylor Rafferty, the company’s investor-relations firm.

Mr. Seiden said he hoped to use the seized records to locate other ZST Digital assets and place a current value on the company. He declined to put a dollar figure on the value of the assets he has seized thus far. “We are aggressively on multiple fronts hunting down assets,” he said.

Neither Mr. Ngan nor ZST Digital could immediately be reached for comment. Mr. Seiden said he had yet to hear directly from the company.

Crowe Horwath International has no information pertaining to ZST Digital, said Kevin McGrath, its chief executive, adding that while the network’s Hong Kong affiliate is ZST Digital’s auditor, the network itself doesn’t do any accounting work. Nonetheless, he said, the company “tried to be cooperative” with the receiver.

A Taylor Rafferty spokesman said the receiver seized electronic copies of documents relating to the firm’s work for ZST Digital. Taylor Rafferty issued press releases for the company and served as a point of contact for ZST Digital in the U.S. The company is no longer a client of Taylor Rafferty’s, the spokesman said.

Mr. Seiden was appointed receiver of ZST Digital in March to help enforce a Delaware Court of Chancery ruling in favor of Peter Deutsch, a major shareholder in the company. The court gave Mr. Deutsch the right to force ZST Digital to buy back his shares for more than $32 million. Mr. Deutsch had won a judgment requiring the company to open its books to him. After ZST Digital didn’t comply with the ruling, the judge awarded Mr. Deutsch a “put option” requiring ZST Digital to buy his shares back at above-market prices.

Some observers have suggested Mr. Seiden, the president of New York forensic-investigation company Confidential Security & Investigations, could have difficulty in attempting to recover ZST Digital’s assets, which the company has said are largely inside China. Thus far, China has refused to cooperate with U.S. regulators in efforts to crack down on potential accounting fraud at Chinese companies.

If Mr. Seiden is successful, however, other investors might be able to use similar strategies to pursue other Chinese companies.

Mr. Seiden said he was very optimistic about recovering further assets—”more optimistic than we were when we first started.”

Mr. Deutsch has said in court filings that he believes ZST Digital and other Chinese companies have withdrawn from U.S. exchanges and stopped filing with the Securities and Exchange Commission to intentionally depress their stock prices and enable the companies to go private at lowball levels.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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