Renren's audit committee chair quits ahead of IPO

Tue May 3, 2011 10:36am EDT
 

By Clare Baldwin

NEW YORK (Reuters) - The head of the audit committee at Renren Inc has resigned to protect the Chinese social networking company from any possible fallout from accusations of accounting fraud at another company where he is an executive.

Derek Palaschuk, chief financial officer of China-based Longtop Financial Technologies Limited, told Reuters in an interview on Monday that he formally resigned from Renren's board of directors over the weekend.

Palaschuk was an independent director for Renren, responsible for chairing its audit committee.

Renren is due to hold an IPO on Tuesday that is expected to raise about $690 million at the mid-point of the price range.

The shares of Longtop fell as much as 34 percent last week after an April 26 report about Longtop by Citron Research, which researches stocks and sometimes takes positions in them.

Longtop's stock opened at $25.47 on April 26, the day Citron published its report. It fell as low as $16.71 on April 27. The stock closed on Monday at $22.40.

In the report, Citron raised questions about what it called Longtop's "unconventional staffing model," gifts of stock made by Longtop's founder and chairman Hiu Kung Ka to employees and friends, and accused Longtop of having "supersized margins."

Longtop provides software and services to financial institutions in China.

In a conference call with analysts on April 28, Longtop defended itself against the claims, and the shares have subsequently regained much of their value.

"We want to emphasize that we will not have to restate our financial results," Palaschuk said on the conference call.

"Citron's accusations of fraudulent practices and over-reporting revenues are false and have absolutely no basis,"

Palaschuk said on the conference call.

Palaschuk said that late last week Renren's Chief Executive Joseph Chen e-mailed him, saying he wanted to speak with him urgently, and that he replied by e-mail that he was resigning from Renren's board and the audit committee.

Palaschuk said he had written in the e-mail: "I am deeply sorry for the attention this situation has caused you. I obviously had no idea it was coming. Even though all of the allegations are without substance it is definitely better for (Renren) that I resign from the board with immediate effect so that there is no unwarranted attention brought to Renren or yourselves. Citron warned of additional reports so this could continue for a long time."

Palaschuk said that he and Chen spoke after the e-mail exchange and that he formally resigned over the weekend. On Monday, he was not listed in Renren's revised IPO filing with the U.S. Securities and Exchange Committee.

Before becoming Longtop's CFO, Palaschuk served as chief financial officer of China-based eLong Inc, chief financial officer of Sohu.com Inc, and as an audit manager with PricewaterhouseCoopers in Hong Kong and Beijing.

In the revised filing, David Chao is listed as Renren's audit committee chair. Chao is a co-founder and general partner of venture capital firm DCM, which has invested in Renren.

Renren declined to comment, citing a SEC quiet period.

Citron said on its website that its principals typically hold positions in the stocks covered in its reports. It does not say when it initiates or covers its positions.

RENREN IPO LOOMS

Last week, Renren raised the expected price range of its IPO by 30 percent. Demand for the stock is expected to be robust as the company taps investor interest in China and social media.

Renren also revised last week the number of monthly unique log-in users it said it had in December 2010. The revision lowered its first quarter growth rate to 19 percent from 29 percent.

Bankers have brushed off concerns about the data and statistics provided by China's technology sector, arguing that the rapid pace of Internet expansion is more important than details.

Renren has raised other issues in regulatory filings with the SEC. It has said that while it has not conducted a comprehensive review, it has found a "material weakness" and a "significant deficiency" in its internal financial controls.

Renren said the material weakness related to insufficient accounting staff with knowledge of U.S. generally accepted accounting principles. It said the significant deficiency was the company not having a formal policy for investing surplus cash and managing its treasury functions.

Analysts have said that such issues are not unusual for Chinese IPO companies.

(Reporting by Clare Baldwin, additional reporting by Alina Selyukh; Editing by Lincoln Feast)