Capital Markets

Under Secretary of State, Keith Krach on the double standard of SEC rules for domestic and foreign investors

Keith Krach: I’d like to talk to you about America’s capital markets because they’re plagued by a double standard. One that tilts the playing field in the favor of Chinese companies. And in many cases against American companies. Today, U.S. businesses seeking capital on our stock exchanges are subject to strict domestic security laws. They spend millions every year complying with generally accepted accounting principles and reporting their financial activities, according to SEC rules. Meanwhile, through Regulation S, foreign companies do not have to comply with such rigorous standards if their domestic regulators do not require them to. While almost all countries have comparable transparency standards, China stands out as the exception. This sets the perfect environment for financial fraud on a broad scale, particularly when these companies are seeking to make that earnings estimate at the end of the quarter. A prime example is, is the recent 300 million dollar revenue fraud, in financial reporting of Lukken Coffee, that’s China’s version of Starbucks. When this was discovered, the stock plummeted, and American investors lost millions, tens of millions of dollars. This fraud will continue. If we don’t act to end it. It will continue because China doesn’t require any form of generally accepted auditing standards. It will continue because many of these Chinese companies are part-owned or state-owned companies of the Chinese Communist Party. And it will continue because the PRC laws are structured to classify company information as State Secrets, which severely limits an independent auditors’ ability to discover the truth.