Avenue Capital Asks Court To Dissolve Troubled Chinese Company Ambow Education


New York-headquartered Avenue Capital is asking the Grand Court of the Cayman Islands to dissolve the Chinese test prep and training school operator, Ambow Education, as a result of an investment that has gone terribly wrong.

Founded by Mark Lasry and Sonia Gardner, Avenue Capital is a private equity and hedge fund investment firm managing US$11.5 billion. Its Asian operations are headed by Mark Harris, a former consultant at PricewaterhouseCoopers.

Avenue Capital may have suffered losses of millions or more by investing in Beijing-headquartered Ambow Education, whose stock stopped trading and last closed at US$0.95.

This is another case of Wall Street’s smartest investors suffering great losses from questionable accounting practices of U.S.-listed Chinese companies.

John Paulson, founder of the giant US$18 billion-under-management hedge fund, Paulson & Co., reportedly lost from US$100 million to over US$700 million in its investment in Sino-Forest Corp., whose stock imploded because of alleged accounting misconduct.

Avenue Capital initially invested in Ambow in September 2007. It joined its peers Macquarie Bank Group, CID Capital, and Cisco Systems to inject US$54 million to Ambow in a private placement. The specific terms of Avenue Capital’s investment are not clear.

On August 5, 2010, Ambow Education IPOed on the New York Stock Exchange at US$10 per American Depository Share (ADS). Avenue Capital, then with a 17% stake of Ambow, didn’t sell.

On March 22, 2013, Ambow Education’s stock halted trading, pending news. Its last trading price was US$0.95.

In a regulatory filling from last month, Avenue Capital disclosed that it is now sitting on 21,599,914 Ambow shares, a 21.6% stake.

There are numerous early warnings signs of Ambow’s accounting problems. Last May, Ambow delayed filling its 2011 annual report because it required additional time to complete the audit of its financial statements.

Two months later, the company’s CFO, Gareth Kung, resigned. Kung was with the company for only seven months. At the same time, a former employee alleged Ambow of financial impropriety and wrongful conduct in connection with Ambow’s acquisition of a training school in 2008, among other problems.

The final blow came with a series of dramatic twists of events. On March 18, Baring Private Equity Asia announced that it will take Ambow private in a US$108 million buyout, paying US$1.46 per ADS in cash.

On March 22, PricewaterhouseCoopers resigned as Ambow’s auditor. Fenwick & West LLP, counsel to its audit committee, also resigned. Four days later, Baring Private Equity Asia withdrew its take-private offer, citing unexpected events.

The central issue of Ambow’s accounting problems is surrounding revenue recognition, according to a source who has inside knowledge of Ambow’s operations.

"Ambow may be recognizing revenues before they delivered the services," says the source. "That practice is not GAAP compliant."

Revenue recognition is a common thread among accounting problems of Chinese companies (Listen to our interview of Paul Gillis, professor of accounting at Peking University, discuss Chinese accounting practices here).

"Ambow’s CEO, Jin Huang, is a visionary self-made woman," says the source. "It’s such a pity."

Jin Huang founded Ambow in 2000. She was previously an engineer at Avant, where she was responsible for product design and engineering management.

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