Fuqi was a PRC based jewelry which had public offering in March 2010, with its shares traded on NASDAQ. Eight months after the stock sale the company announced it would restate the first three quarters of 2009 due to accounting errors. Its earnings had been overstated by 12% to 23%. While completing the restatement the external auditors discovered that between September 2009 and November 2010 Chong (the chairman) had directed the transfer of about US$134m in over 50 transactions from firm bank accounts to accounts at other banks for three jewelry companies in China. The transfers were booked as “other payables” or “prepaids.” The board of directors was unaware of the transactions.
After an internal investigation, Chong explained that he authorised the transactions at the request of a local bank manager despite the fact that he did not know the three companies to which the funds were transferred. The firm was able to furnish the staff with documentation for about 19% of the transactions. Although the funds were returned to the company, not all of the money was returned to the same bank accounts or in the same amounts as the initial transfers.
The company lacked adequate internal accounting controls to control such transfers. The transactions were not disclosed by Fuqi until March 2011 when a press release was issued and only after the external auditors sent the board of directors a six page letter providing notice of a potential fraud and violations of internal controls and accounting irregularities surrounding the transactions.
The shares were delisted and the class action succeeded.
SEC Actions: SEC Files Another Fraud Action Centered on a PRC Based Issuer, 1 Jul 2013
Fuqi International: Annual Report 2008