WASHINGTON -- Two companies in a $1.4 billion Asia investment fund managed by New York banking firm Morgan Stanley unexpectedly told securities regulators they will not file their financial statements on time and froze trading in their stocks.
The fund's American investors include the University of Michigan's endowment and a foundation supporting Appalachian children at risk.
The publicly traded companies, Tianhe Chemicals Group Ltd. and Sihuan Pharmaceutical Holdings Group Ltd., separately announced late last week that they would be unable to meet Hong Kong Stock Exchange deadlines because auditors have not yet signed off on their financials. Both companies pledged to cooperate with the auditors.
Tianhe and Sihuan are valued at $3.7 billion and $6 billion, respectively. They are among 16 companies that comprise a private equity fund managed by Morgan Stanley & Co. LLC, known as Morgan Stanley Private Equity Asia Three, or MSPEA III. An Australian and an Indian company owned by that fund have already failed amid criminal and civil fraud allegations.
A spokesman for Morgan Stanley, Nick Footitt, declined to comment on the missed filings. A Tianhe spokesman also declined comment. Sihuan responded to some questions in an emailed statement but said only that the auditors needed more time and that the company was operating as usual.
The filing delays raise questions for Morgan Stanley, which picked the companies and promoted them as multibillion-dollar growth stories.
"This is not something an auditing firm would do lightly," said Paul Gillis, a former Partner for PricewaterhouseCoopers LLP in China who now teaches accounting at Peking University. "There are only two reasonable explanations for being late. One is management incompetence. Two is they're fighting with the auditors. And neither one of those is good."
Tianhe and Sihuan could eventually receive a clean bill of health, although announcements about earnings delays because of unfinished audits are generally regarded as portending bad news. Any material problems that led to the delay would have to be disclosed once the companies file their financials.
As U.S. investors increasingly consider Chinese stocks, they rely on investment banks such as Morgan Stanley to keep troubled Chinese companies from reaching the market.
Morgan Stanley's private equity team has promised investors it will perform rigorous due diligence and take stakes only in companies where it could exert influence or control. As part of its investments in the two companies, the same Morgan Stanley executive director, Homer Sun, received a seat on each company's board.
Tianhe Chemicals, the largest investment in the Morgan Stanley fund, was the subject of an investigation by The Associated Press last year and already had its stock frozen last year amid allegations that the company overstated the scale and sophistication of its business.
Sihuan describes itself as one of the largest producers of drugs sold to Chinese hospitals.
Tianhe was the subject of significant public scrutiny over its financials. In September, a shadowy group tied to speculators betting against Tianhe's stock published allegations that the company had overstated its business in a Morgan Stanley-led public offering just a few months earlier.
An AP investigation corroborated many discrepancies. Tianhe said records cited by AP were outdated and disputed other findings.
Business on 03/31/2015