Capital Markets

China Life Said to Be SEC Target

A U.S.-led investigation would be a setback for other deals proposed for Western exchanges.
Stephen TaubApril 6, 2004

The Securities and Exchange Commission has launched a probe of China Life Insurance Co., according to the Financial Times. China Life’s $3.4 billion underwriting last December in New York and Hong Kong — which raised more money than any other initial public offering in the world last year — touched off a wave of deals involving China-based companies.

A spokeswoman at China Life’s headquarters in Beijing told the Associated Press that the company was aware of an “informal” SEC probe but denied any wrongdoing.

China Life then fired off a press release stating: “We have been aware of certain media reports which allege that the U.S. Securities and Exchange Commission has started an informal inquiry….To the best knowledge of the company, it has not received any notice…in relation to the inquiry.”

This would reportedly be the first investigation by the SEC into an initial public offering by a state-controlled Chinese group. If a probe is indeed under way, it would be a major setback for other companies planning to bring deals to the United States and other Western exchanges. According to the FT, Chinese companies are planning to trot out more than $15 billion in IPOs this year.

An investigation would once again raise concerns about corporate governance practices in China. According to the newspaper, Hong Kong regulators are also conducting their own inquiries into the circumstances surrounding China Life’s listing, which was approximately 25 times oversubscribed, according to published reports.

In February, China’s National Audit Office disclosed it had found accounting irregularities involving $652 million at China Life before it was restructured for its mid-December stock listing, according to the Associated Press. China Life responded that its listed company, China Life Holdings, and the parent company, China Life Group, are two separate entities, reported the AP.

This distinction was a big surprise to investors, who last week filed a class action lawsuit asserting that China Life failed to disclose that information before its shares were listed.

The complaint, filed by Milberg Weiss Bershad Hynes & Lerach LLP, alleged that the company failed to disclose that it engaged in a massive financial fraud; that at the time of the IPO, the National Audit Office of China had completed or was about to publish its adverse audit findings of the predecessor company which, under a new name, controls the listed company, China Life; that the predecessor company, under a different name, engaged in criminal acts; and that China Life’s share price would be tied to the illegal acts already known to the defendants, two-thirds of whom were directors, executive officers, or senior managers of the predecessor company.