US university, foundation invested in frozen Chinese stocks

AP News
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Posted: Mar 30, 2015 5:14 PM
US university, foundation invested in frozen Chinese stocks

WASHINGTON (AP) — The University of Michigan, defense contractor Lockheed Martin Corp. and a foundation helping Appalachian children all own stakes in an overseas investment fund backing two major Chinese companies, which recently froze their stocks and missed financial reporting deadlines.

The American organizations invested in the $1.4 billion fund — managed by New York banking giant Morgan Stanley — for their endowments or retirement funds, parts of which could be at risk amid news that auditors have yet to sign off on the Chinese companies' books.

Those delays sometimes mean accounting troubles are ahead, which could put the investments in jeopardy. But the companies declined to explain the reasons for the unusual delays, and would say only that the auditors' work wasn't finished.

"This is not something an auditing firm would do lightly," said Paul Gillis, a former partner for PricewaterhouseCoopers in China who 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," he said.

The millions of dollars the American investors have placed in the fund account for only a small part of their financial portfolios, so the potential risk is small. But as U.S. investors increasingly consider Chinese stocks, they are reliant on banks like Morgan Stanley to guide their decisions and keep troubled companies from reaching the market.

The twin filing delays also raise new questions for Morgan Stanley, which picked the companies from obscurity and then promoted them as multibillion-dollar growth stories.

The publicly traded Chinese 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. 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, known as Morgan Stanley Private Equity Asia 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 this story. A Tianhe spokeswoman also declined to comment. Sihuan responded to some questions in an emailed statement, saying only that the auditors needed more time and that the company was operating as usual.

The University of Michigan invested about $20 million in the fund for its $9.7 billion endowment. The Claude Worthington Benedum Foundation, which supports education and development in Appalachia, holds a $2.8 million stake as part of a $375 million endowment. Lockheed Martin's pension fund is also an investor, according to Bloomberg data, but the size of its stake is unclear.

The university and Lockheed Martin declined to comment on this story. A representative for the Benedum Foundation said his group would look at the investments but couldn't elaborate.

Tianhe and Sihuan could eventually receive a clean bill of health. Any material problems that led to the delay would have to be disclosed once the companies file their financials.

Morgan Stanley's private equity team has promised investors it would 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, sits 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. It announced in October that it was collaborating with the Chinese military on a new Ebola drug treatment called jk-05. But a scientist for the World Health Organization, Martin Friede, told the AP that the company has declined WHO's repeated requests to provide information about the molecular structure of the drug. The World Health Organization coordinates clinical trials on Ebola drugs, and Friede described sharing such information as standard procedure.

"I would imagine that if it was really novel, and if there was really good information, they would want to share it," Friede told the AP. "So, connect the dots."

Sihuan did not say why it had not provided information about the drug to the WHO. A spokeswoman said the drug is "a new molecular entity based on Favipiravir," an existing experimental Ebola drug created by Japan's Fujifilm Holdings Corp. Sihuan has filed for a patent on its improved version of the drug that it expects can be administered orally or via injection, the spokeswoman said.

China's Center for Disease Control told the WHO that the Chinese drug is identical to Favipiravir, Friede said.

Fujifilm Holdings spokesman Kana Matsumoto told the AP that her company also questioned whether Sihuan's drug was new.

"We have already notified the Chinese Embassy that Avigan (another name for Favipiravir) is protected by a substance patent, application patent and process patent in China," she said.

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. The controversy drew public notice from its auditor, Deloitte Touche Tohmatsu Ltd., which Gillis said would have been expected to put extra emphasis on its next audit process.

"The auditors have had plenty of time to look into the allegations and dismiss them," Gillis said. "In this case, everybody would have been paying attention."