By Matthew Miller
BEIJING (Reuters) - Global accounting firm KPMG has suffered a major setback in its battle against liquidators of former U.S.-listed healthcare firm China Medical Technologies Inc, whose executives have been charged in the U.S. with defrauding investors out of over $400 million.
The China Medical case is the most high-profile and closely watched contest in years over the production of Chinese audit work papers, an issue that has put Hong Kong and U.S. regulators at loggerheads with China - and at one point threatened to leave U.S.-listed Chinese firms unaudited and in danger of delisting.
In a previously unreported ruling made last week, Hong Kong's High Court rejected a KPMG procedural request that would limit the time in which China Medical liquidators can pursue claims against KPMG for losses and damages for its audits of the now-defunct company.
The ruling also paves the way for proceedings on a contempt summons brought against 91 KPMG partners and former partners issued in November for refusal to comply with a High Court order to produce China Medical's audit work papers.
A substantive hearing on that action is widely expected later this year.
KPMG and mainland associate KPMG Huazhen have refused to comply with a 2016 Hong Kong High Court order to provide copies of audit work papers to Borrelli Walsh Ltd, China Medical's liquidator, arguing it would violate China's national security laws.
Deputy High Court Judge Anthony To, in last week's decision, wrote that KPMG's refusal to hand over the papers made it "extremely difficult" for liquidators "to determine whether or not to commence proceedings against KPMG".
KPMG in Hong Kong, that signed off the audits, has claimed it does not have the papers. KPMG Huazhen has allowed liquidators to examine some of China Medical's papers on site under the supervision of the auditor's personnel and attorneys, a situation Judge To characterized as "unworkable".
KPMG did not respond to telephone calls and emails seeking comment. Borrelli Walsh declined to comment.
China Medical was placed into liquidation in 2012 by courts in the Cayman Islands, New York and Hong Kong, following accusations the NASDAQ-listed firm was a fraud.
Company liquidators have presented evidence showing the company's former management had stolen at least $355 million through fake technology acquisitions. Reuters has been unable to contact the accused or their representatives for comment.
KPMG was China Medical's auditor between 2005 to 2009, and provided unqualified audit opinions for financial statements of the firm and its subsidiaries during that period.
KPMG faces a myriad of legal and regulatory problems, said Paul Gillis, professor of practice at Peking University's Guanghua School of Management.
"KPMG used its letterhead on the audit report and they didn't do the work," Gillis said, referring to KPMG signing off audit work by KPMG Huazhen. "By claiming they did the (sign-off) work, they made it impossible to argue they don't have access to work papers."
Judge To, in his judgment provided a stinging rebuke of KPMG's refusal to cooperate with the liquidators.
"It is disingenuous for KPMG to argue that it cannot comply with the court orders because its associate KPMG Huazhen will not comply with KPMG's request," Judge To wrote.
(Reporting by Matthew Miller; Editing by Jennifer Hughes and Christopher Cushing)
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