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SEC grilled over its Deloitte China legal case

THE US SECURITIES & EXCHANGE COMMISSION has been given a grilling by a presiding judge as to which rules it used to subpoena Deloitte China.

The SEC is attempting to force Deloitte China to hand over audit documents relating to US-listed Chinese company Longtop Financial Technologies.

According to reports, SEC attorney David Mendel was unprepared for several questions from presiding Judge Deborah Robinson, during the hearing to determine whether the papers must be handed over.

Among her line of questions, Judge Robinson asked which federal rules the SEC relied on when it served Deloitte China’s US-based attorney with a subpoena in May 2011, Reuters reports. The SEC required a break in order to answer questions posed by the judge.

“I am going to suggest you review the rules so you can answer my questions more specifically,” Judge Robinson told Mendel.

The line of questioning raises questions about the SEC’s ability to handle complex and delicate legal matters when it comes to China.

The SEC is in court trying to convince magistrate Judge Robinson to force Deloitte’s US arm, Deloitte Touch Tohmatsu CPA, to hand over Chinese audit documents. The documents are from Longtop Financial Technologies which is suspected of committing fraud.

However, Deloitte argues it is barred from handing the documents over by Chinese secrecy laws and is urging the SEC to seek resolution through with the Chinese regulators.

“It would violate Chinese law and it would expose Deloitte Touche Tohmatsu CPA to severe sanctions, including the possible imprisonment of its partners,” Latham & Watkins attorney Miles Ruthberg argued in court in Deloitte’s defense.

A diplomatic solution between the SEC and Chinese regulators has proved elusive, with the SEC claiming those talks have broken down.

Previously the SEC said the Chinese Securities Regulatory Commission “remains unwilling or unable to provide the SEC with meaningful assistance in its enforcement investigations”.

The SEC has had a series of problems when trying to invetigate Chinese companies and their auditors. Many of the companies have de-listed from the US-stock exchange or seen their auditors resign when accounting practices are looked at.

Deloitte argues the SEC’s issue is partly its own making as the regulator knew of the Chinese secrecy laws before it allowed these businesses to list on the US stock exchange.

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