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Recently we heard SEC hitting 4 accounting farms auditors of Chinese companies.

China laws forbid auditors from providing original documents to other regulatory commissions.

There is an agreement between the SEC and CSRC (regulatory commission in China), anyway the laws of the 2 countries are in conflict and an agreement should be found.

Internet related companies were mostly hit, while large companies or companies with China government participation, like Petrochina (NYSE:PTR) or China Mobile (NYSE:CHL) were immune.

It is not clear what will happen to those Chinese stocks, if they could trade OTC or just in local market in local currency.

Even US companies doing business in China like Caterpillar, Qualcom or Advanced Microdevice need an auditors from China and could be affected by the SEC action.

Many US investors think the SEC is protecting them, but it is not always true.

While a regulation is necessary, SEC cannot prevent fraud and in some cases the action is hurting investors.

Take as example the MFG situation. The wrongdoing was to use client funds as collateral for proprietary trading. Had MFG been let able to trade, the losses would have recovered without clients losing their money as the market moved in line with MFG position.

Ironically, if the regulators did not act there would been no loss for clients.

The big problem is that the responsible was not punished, so other frauds are possible in the future, as no criminal charge was advanced.

There is an act in fraud legislation that states what results in a fraud is a fraud. In other words, the inquisitors do not need to prove the intention to commit a fraud to convict someone with criminal charge.

It is enough that a fraud took place. In this case someone inside MFG stole segregated clients funds.

Another example is Satyam computer, an Indian company. The CEO committed fraud against the shareholders, but the SEC was totally useless to US investors. The SEC got 10 millions from the Ceo to settle the case, but nothing for investors. The same with Citigroup and mortgage funds.

My take is that regulation is necessary, SEC role is important, but if investors are not protected and those committing frauds are not persecuted, the SEC role is worthless.

So there is a political fight between US and China actually asking to be resolved. Protectionism is what can turn a recession in to a great depression, like it did in 1930. Hopefully the politicians will remember.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: long PTR CHL QCOM