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Investors in home-appliance manufacturer Guangdong Kelon Electric Co filed a lawsuit against the firm yesterday after it was fined by the securities regulator for overstating profits by 378.2 million yuan (US$47 million).

 

Accounting firm Deloitte, Kelon's auditor for the 2002 to 2004 financial years, failed to disclose the internal fraud and will be the second defendant in the suit. But the regulator hasn't yet handed a penalty notice to the firm after an administrative hearing in April.

 

Gu Chujun, ex-president of Kelon, and other top management will also be sued, according to a lawyer on the case.

 

Kelon was fined 600,000 yuan (US$75,000) by the China Securities Regulatory Commission (CSRC) on Wednesday and the company's top management also received fines of between 50,000 yuan (US$6,250) and 300,000 yuan (US$37,500).

 

Under China's Securities Law an administrative penalty from the regulator can form the premise for civil action. Investors were unable to file a suit until Kelon was penalized by the CSRC.

 

Many lawyers involved in the case believe the CSRC was not tough enough on Kelon.

 

"The proper fine should at least exceed 1 million yuan (US$125,000)," Hu Fengbin, a lawyer with Beijing-based Zhong Gaosheng Law Firm, told China Daily. "And the CSRC didn't put a market access prohibition on Gu Chujun, which means he could still stage a comeback later."

 

Hu is a member of a group of 51 lawyers aiming to protect the interests of investors in the Kelon case.

 

"For the moment, the regulator mainly uses administrative means to punish listed companies for their fraudulent behavior," he said.

 

"It seldom pursues the criminal responsibilities of the major troublemakers and asks for civil compensation," he continued. "In that case the cost for fraud is very limited."

 

Given the influence of interest groups in the case Hu said he wasn't optimistic about the final result of the lawsuit. But he said he hoped to raise the awareness of investors through the case to protect their interests.

 

"Quite a number of investors only care about short-term interests," Hu said. "Some of them even believe Kelon's shares plummet was triggered by the lawsuit."

 

Hu is currently representing 20 investors in the lawsuit but the number is growing. One of them suffered millions of yuan in losses in the Kelon scandal, he said. The company's Hong Kong-traded shares have fallen 45 percent since the story broke.

 

Kelon was once one of China's leading companies because of its smartly designed refrigerators but was thrust into crisis when the CSRC began its investigation in May 2005.

 

The firm reported a net loss of 44.7 million yuan (US$5.52 million) in 2004 after posting profits of 84.2 million yuan (US$10.4 million) in 2002 and 197.3 million yuan (US$24.36 million) in 2003.

 

The lawsuit may slow the ongoing restructuring of Kelon and Hisense, analysts said. Qingdao-based Hisense has secured a 26.43 percent stake in Kelon for 680 million yuan (US$84.9 million), becoming its largest shareholder.

 

But Hisense is still fairly optimistic about prospects and it plans to inject its refrigerator and air-conditioning products into the Kelon business. .

 

"This is definitely something we will do," Hisense Vice President Cheng Kaixun was quoted by Reuters as saying. "We hope to do this by year-end but there are lots of procedures we have to go through."

 

(China Daily July 7, 2006)