The pressure may be off Deloitte Touche Tohmatsu CPA Ltd. for six months following a request Wednesday from the Securities and Exchange Commission to stay its case against the Shanghai-based firm.
The SEC has demanded that Deloitte turn over auditing documents related to former client Longtop Financial Technologies Ltd. The Deloitte firm resigned as Longtop’s auditors in 2011 amid signs of a massive fraud at the Chinese financial software company. But the firm says it can’t hand them over for fear of violating China’s strict and broadly interpreted state secrets laws.
In September, the SEC filed an action against the firm in the District of Columbia to enforce a May 2011 subpoena seeking audit documents of Longtop. The court ordered in January that Deloitte show cause why it should not be ordered to produce the subpoenaed material.
But in a court filing Wednesday, the commission revealed that SEC Chairman Mary Schapiro had met with the head of the China Securities Regulatory Commission in early July to discuss document sharing, among other issues. As these discussions continue, the SEC wants the case stayed until January.
Deloitte had repeatedly said in court filings that giving documents directly to the SEC could put employees in prison for violating Chinese law.
However, the firm said it could give the CSRC auditing documents for Longtop, which the SEC charged in November for failing to file accurate financial reports. Deloitte said the commission could then negotiate with the Chinese government to obtain the documents.
The SEC said no solution on document sharing has been reached but that negotiations are ongoing.
“If these negotiations can develop a viable alternative means by which the SEC can obtain the audit workpapers and other documents sought by the Subpoena in the near term,” the filing said, “it could have a significant impact on the appropriate resolution of this case.”
If the motion to stay is approved, the case will be on hold until January as officials continue to meet and the SEC tries to develop a mechanism to obtain audit papers from the CSRC, the filing said.
The China-based operations of PricewaterhouseCoopers, Ernst & Young and KPMG have reportedly also been asked by the SEC to produce documents on their audits of companies in China. A positive resolution to negotiations could dissipate pressure on firms caught between conflicting U.S. and Chinese laws.
“This development is consistent with the overall effort to achieve a negotiated resolution between U.S. and China regulators,” said Matthew Close, a partner in the securities practice of O’Melveny & Myers LLP. “It seems apparent that those talks are progressing and are at an important juncture.”
The SEC had a reply brief in the Deloitte case due July 23 and said it would instead give a status report on negotiations no later than January 18.
Deloitte said in a statement that it is pleased that U.S. and Chinese regulators are making progress in talks and hopes the two sides will reach an agreement on production of documents.
The commission had asked in May for a 60-day extension to file the brief because negotiations were ongoing with Chinese regulatory officials regarding various issues, including cross-border cooperation.
Also in May, the SEC opened an administrative proceeding against Deloitte’s China arm for not providing audit documents related to another unnamed company.
A call for comment from Deloitte’s attorney Michael Warden, a partner at Sidley Austin LLP, was not immediately returned. SEC attorney Mark Lanpher declined to comment beyond the filing.
UPDATE: The story was updated July 20 to include comment from Deloitte.