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BDO China Dahua CPA Co., Ltd.; Ernst & Young Hua Ming

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BDO China Dahua CPA Co., Ltd.; Ernst & Young Hua Ming UNITED STATES OF AMERICA RECEIVED -1 n Before the J;J SECURITIES AND EXCHANGE COMMISSION ADMINISTRATIVE PROCEEDING File Nos. 3-14872, 3-15116 In the Matter of BDO China Dahua CPA Co., Ltd.; Ernst & Young Hua Ming LLP; KPMG Huazhen (Special General Partnership); The Honorable Cameron Elliot, Deloitte Touche Tohmatsu Certified Public Administrative Law Judge Accountants Ltd.; and PricewaterhouseCoopers Zhong Tian CP As Limited, Respondents. DIVISION OF ENFORCEMENT'S DISCLOSURE OF EXPERT CHYHE K. BECKER Pursuant to the Comi's Order On Joint Motion To Amend Hearing and Prehearing Schedules, dated June 10, 2013 ("Scheduling Order"), the SEC's Division of Enforcement ("Division") hereby discloses its rebuttal expert, Dr. Chyhe K. Becker, on remedies. Attached hereto are the Rebuttal Summary Report of Chyhe K. Becker and accompanying exhibits. 1 Dated: July 19, 2013 Respectfully submitted, Q~~ David Mendel (202) 551-4418 Amy Friedman (202) 551-4520 Douglas Gordimer (202) 551-4891 Marc E. Johnson (202) 551-4499 Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-5971 COUNSEL FOR DIVISION OF ENFORCEMENT 2 UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION ADMINISTRATIVE PROCEEDING File Nos. 3-14872, 3-15116 In the Matter of BDO Dahua CPA Co., Ltd; Ernst & Young Hua Ming LLP; KPMG Huazhen (Special General Partnership); Deloitte Touche Tohmatsu Certified Public The Honorable Cameron Elliot, Accountants Ltd.; Administrative Law Judge PricewaterhouseCoopers Zhong Tian CP As Limited Respondents. REBUTTAL SUMMARY REPORT OF DR. CHYHE BECKER I. Qualifications 1. I am the Assistant Director in charge of the Office of Litigation Support in the Division of Economic and Risk Analysis at the U.S. Securities and Exchange Commission. I serve as a point of contact for attorneys throughout the Commission for infonnation on the economics of securities law violations. I perform economic analysis in suppmi of the Enforcement Division of the Commission, and I supervise a staff of financial economists that supp011 the Enforcement Division through economic and quantitative analysis and research. 1 2. I joined the SEC in March 2008. Prior to joining the SEC, I was a principal at Chicago Partners LLC, where I specialized in securities litigation. Prior to Chicago Partners, I was a principal with the Economic Consulting group at Deloitte Financial Advisory Services LLP. I received an M.B.A. and Ph.D. in Financial Economics from The University of Chicago Booth School ofBusiness, and a B.A. in Psychology from Yale University. In addition, I taught corporate finance at The University of Chicago Booth School of Business. My research has been published in the Journal of Financial Intennediation. My curriculum vitae is attached as Appendix 1. 3. My compensation is unaffected by my work in support of this matter, or the outcome of this matter. 11. Scope 4. I have been asked to summarize the economic research on two separate topics in this report. 1 5. The first topic is the economic impact of enforcing U.S. securities regulations. Respondents' proposed expe1i Paul Atkins writes that "[i]mposing the sanctions sought by the SEC would negatively affect investors, issuers, and the U.S. securities markets."2 This statement does not appear to be suppmied by any original research perfonned by Mr. Atkins, and Mr. Atkins cites no scholarship in suppmi of that proposition. Mr. Atkins has described ce1iain costs that he claims will derive from the proposed sanctions, but he does not describe any benefits that might result from the proposed sanctions, nor docs he acknowledge the costs that might result from a failure to enforce the securities 1 Throughout this document the term "economic research" includes research in business and finance. 2 Expert Report of PaulS. Atkins, page 18. 2 laws by imposing sanctions on the Respondents. In response to his testimony, I have been asked to summarize the economic research regarding the costs and benefits of enforcing U.S. securities regulations. 6. The second topic is the expected economic impact of the proposed sanctions for the securities of the Respondents' current audit clients. I have been asked to respond to testimony from Respondents' proposed expert Laura Simmons that the predicted decline in value of the audit clients' US-traded shares is a 50 percent drop for stocks listed on the NYSE and a 19 percent drop for stocks listed on the NASDAQ. Below, I have summarized economic research relevant to potential costs and benefits of the proposed sanctions to the Respondents' current audit clients. III. Summary of Findings 7. Costs and Benefits of Enforcing Securities Regulations: Economic research indicates that investors, issuers, and markets realize important benefits from the enforcement of U.S. securities regulations. The research shows that investors benefit from higher stock prices, less aggressive accounting practices, and more discipline on management. It also shows that issuers benefit from a lower cost of capital. Finally, economic research shows that enforcement of securities laws is associated with more robust markets, as indicated by higher market capitalization, trading volume, and the number of initial public offerings, and a lower premium paid for control in corporate control transactions as well as lower ownership concentration among the largest fim1s in the country. 8. Taken together, these results support the conclusion that a strong program of securities law enforcement in the United States helps investors and issuers. Additional studies 3 indicate that there is a particular need to enhance the SEC's enforcement program with regards to cross-listed companies. Further, studies of Chinese companies indicate that minority shareholders of these finns may be particularly vulnerable. Therefore, although it is true that Respondents' cuiTent audit clients may incur costs from enforcement of the laws requiring production of audit work papers, economic research indicates that the broader population of investors and issuers on US exchanges would realize important benefits from this enforcement action. 9. Costs of Proposed Sanctions: Dr. Simmons likely overestimates the drop in market price if the Respondents' cuiTent audit clients are forced to delist from US exchanges. She reports that research shows that the stock price drop in response to a delisting is approximately 50% if a firm delists from the NYSE, and approximately 19% if a finn delists from the NASDAQ. However, in the quoted research, the primary reason for these delistings is a performance failure on the part of the issuing firm. The authors of both of the papers on which Dr. Simmons's calculations rely report that reasons for most of the delistings include circumstances of economic and financial distress such as bankruptcy and failure to meet minimum thresholds for stock price or market capitalization.3 Because any delisting of the Respondents' cuiTent audit clients would be unrelated to financial and economic distress of the issuers, these figures do not provide an accurate basis for estimating a stock price decline. 3 "Many [of the 55 firms included in the study] violate multiple delisting criteria, but the most cited factors are share price below the minimum (39 firms) and market capitalization below the minimum (37 firms). These two conditions are often, but not always, congruent: 11 of the 37 firms delisted for market capitalization did not fail the share price requirement. Bankruptcy led to the delisting of 19 firms in our sample." Macey, Jonathan; O'Hara, Maureen; Pompilio, David, "Down and Out in the Stock Market: The Law and Economics of the Delisting Process," Journal of Law and Economics, 51(4), November 2008, p. 693. See also Table 2 from Harris, Jeffrey; Panachapagesan, Venkatesh; Werner, Ingrid, "Off but not gone: A study of Nasdaq delistings," Fischer College of Business Working Paper, (2008), p. 29. 4 10. Dr. Simmons does not appear to consider the infonnation from research on voluntary delistings that provides substantially smaller estimates of stock price reactions to the delisting events. Taken together, the evidence suggests that Dr. Simmons overstates the consequences of the proposed sanctions for the Respondents' current audit clients and their shareholders. IV. Sources Considered 11. I searched for relevant economic research using the "Econlit" database. Econlit is a comprehensive database of economics research. This database contains about one million records, with citations and abstracts dating back to 1886. It is produced by the American Economic Association, and it is widely used by economists as an authoritative source for published research. It covers more than 1,000 journals, and it is updated monthly. 4 12. First, I used the search tenns "securities and regulation and enforcement." These search tenns produced 158 journal articles. The full set of 158 articles and their abstracts are included in Appendix 2. Second, I used the search term "delisting." This search tenn produced 69 journal articles. The full set of 69 journal atiicles and their abstracts are included in Appendix 3. Third, I used, separately, "foreign listing" and "overseas listing." These search terms produced 139 joumal articles, and 23 joumal articles, 4 Information about Econlit is available from the following websites: http://www.aeaweb.org/econlit/~ http :(/jhsearch .I ibrary. jh u. ed u I data bases/data base/J H U041311 http ://gu ides.libra ry. harvard. ed u/content. ph p ?pid=l7663 7 &sid=l487256 I http :1/www .ebscohost. com/corporate-research/ econ lit, http://www. proq uest.com/en- US/ cat a logs/data bases/deta i 1/ eco n Iit -set -c.shtm I I http ://1 i bra ry .dialog. com/b Iuesheets/htm 1/biO 139. htm I 5 respectively. The full set of these journal miicles and their abstracts are included in Appendix 4. 13. I limited my review to miicles published in the top journals in finance. To identifY the top journals in finance, I used four sources.
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