DISCLOSURE AND THE CFO
By Cesar Bacani

At first, it all seemed part of the normal ebb and flow of any business. On May 15, Shanghai-based financial information company Xinhua Finance Limited (XFL) promoted Shelly Singhal, a director and CFO of its Nasdaq-listed subsidiary, Xinhua Finance Media (XFMedia), to executive director of a new shared-services unit. Just four days later, on May 19, Singhal suddenly resigned from all his board and managerial positions in the Xinhua group. (The CFO of XFL, Gordon Lau, is a member of the board of advisors for CFO China, a sister publication of CFO Asia. He will leave the company on July 1 “to pursue other interests”.)

An article in the May 21 issue of US business magazine Barron’s, published shortly before Singhal’s resignation, reported that Singhal had run California-based Bedrock Securities, which has been under a cease-and-desist order from the National Association of Securities Dealers for violating SEC rules. Barron’s also said that Singhal “was fighting a civil racketeering suit in California courts for his investment activities,” and that after becoming an investor in XFL in 2003, had been “a major investor in a couple of companies called AremisSoft and ACLN – which turned out to be outrageous frauds.”

Singhal claims that the civil suit is “frivolous” and that the decision not to disclose it in XFMedia’s IPO prospectus in March was made on the advice of the underwriters. He also says that the cease-and-desist order against Bedrock was lifted in December 2006 and that he owned less than 1% of AremisSoft and ACLN.

Still, the circumstances surrounding Singhal’s resignation add to Xinhua’s growing credibility problem. As part of an effort to establish itself in the corporate governance advisory business, XFMedia last August acquired a 19.9% stake in US proxy advisor Glass Lewis, and bought the remaining shares in January. In May, shortly before Singhal’s resignation, two of Glass Lewis’s most respected researchers – Lynn Turner, former chief accountant of the SEC, and Jonathan Weil, a former Wall Street Journal reporter – stepped down, joining five others who left earlier.

A source familiar with the events says the two men had concluded from their own investigations that XFL and XFMedia did not meet Glass Lewis’s own proxy voting guidelines. For example, they had concerns about the independence of directors and about the reporting of related-party transactions, including some by board members and company officers.

A spokesperson for XFL declined to discuss specifics because of shareholder suits. But she notes that the boards of both XFL and XFMedia will have a majority of independent directors as soon as possible. Kevin Cameron, co-founder and president of Glass Lewis, will co-chair a committee that will make additional recommendations. Everyone will be watching.