A guest post from Eric Harris (a White Collar Defense Attorney and Anti-Corruption Compliance Consultant).
The DOJ and SEC recently announced an enforcement action against BIT Mining Ltd., which is the successor entity of 500.com. The action was brought against Bit Mining Ltd. due to 500.com’s migration from the online sports lottery business in 2021 to focus on cryptocurrency mining. 500.com’s activities are the focus of the agencies’ enforcement action against BIT Mining Ltd. as it is the responsible entity due to the nature of inherited FCPA violations. As such, 500.com is referred to as the entity at issue here.
Since the release of 500.com’s enforcement action, some have wondered whether the 500.com enforcement action is the first FCPA enforcement against a “Chinese issuer” (while acknowledging that 500.com was not technically a Chinese issuer). However, there are some practical reasons a similar enforcement action has not previously been brought with the fact pattern therein. Moreover, there are additional likely causes for the lack of a similar fact pattern in prior FCPA enforcement activity.
500.com was incorporated in the Cayman Islands, with headquarters and major business operations in Shenzhen, China. The entity had American Depositary Shares (ADS) traded on the New York Stock Exchange (NYSE), making it subject to the FCPA. BIT Mining, a crypto assets mining business, also incorporated in the Cayman Islands, is headquartered in Ohio with ADS’s also traded on the NYSE. In neither instance was the entity incorporated in China. The major operations of 500.com were in Shenzhen, China, but this is not a Chinese entity traded entity on the NYSE for legal purposes unless you assert that the operational capacity and controlling parties were all located in China, making it a de facto Chinese entity/issuer.
As noted here, the concept of a China-based operational company trading on a U.S. exchange harkens back to the ultimately problematic boom in China-based reverse mergers in the late 2000’s. As noted here, there is a renewed focus on these types of activities by the SEC, but a specific focus on China is not mentioned (identifying both the surge in reverse mergers during the 2006-2010 time-period and renewed focus in 2024). However, as noted here, there have been regulatory wranglings over the past few years that indicate that the SEC is concerned about Chinese-owned and -controlled entities. Not all China-backed reverse mergers were ultimately problematic, but a significant number were. The activities of 500.com were not akin to a reverse merger by definition, but the late 2000’s boom from China is illustrative on why there hasn’t been a largely similar enforcement fact pattern in the past.
These late 2000’s China-backed reverse mergers largely took successful Chinese enterprises and merged them into U.S. shell companies that had solely financial resources. The Boards of these U.S. entities often had little to no control over the activities of these Chinese-owned, controlled, and operated entities in various areas, particularly compliance.
In this case, we have 500.com which was a similarly Chinese-owned, controlled, and operated entity, albeit incorporated in the Cayman Islands, which for these purposes is similar to a U.S. shell company with no transparency into the Chinese operations. In the late 2000’s, accounting irregularities and other concerns led to the SEC looking into many of these companies.
What typically occurred was a proverbial handcuffing of the SEC’s ability to pursue an FCPA specific enforcement action due to the following. The SEC has no subpoena power over the Chinese-entity itself, but only the U.S. shell company. Often the U.S. shell company: (1) possessed no documents or information except for what it filed with the SEC; (2) possessed Chinese-created response documents or information on the Chinese operations; and/or (3) no meaningful control over the Chinese entity to compel it to provide information for a meaningful response. Chinese management had no incentive to disclose nefarious dealings and the audit industry within China has been involved in corruption for decades. Even Big Four U.S. firms, such as PwC, have been swept up by the SEC for activities in China. This led to a dearth of information for the SEC to consider in pursuing an FCPA enforcement action. Though the U.S. has an MLAA with China, there are no known instances where this has been used in an FCPA matter.
The SEC had another tool in its toolbelt for this situation: SEC action of de-listing, typically causing the movement of the stock to the OTC market (at the time referred to as the “Pink Sheets”) due to the failure to satisfy the SEC’s requirements. If you review the EDGAR filings and notices of these companies, the issues are identified as “accounting errors” or “accounting irregularities.” The FCPA-oriented defense bar is unlikely to read these types of filings unless the entity is a client and; moreover, even if reviewed the notices do not indicate that the irregularities are related to an SEC inquiry related to the FCPA.
In these situations, the Chinese entity, which is the true entity at issue, had several options. First, the entity could continue to trade on the OTC market, but this in most instances reduced the market capitalization and the purpose of the reverse merger. Second, the Chinese operations could have attempted to move its operations to a different Chinese entity and relist through another reverse merger, but this is impossible to track and would be difficult in practice. Third, the entity could rebrand itself and relist on a different exchange, for example the Hong Kong exchange. This was also difficult in practice due to the practical ties between other global exchanges and the Hong Kong exchange. Lastly, the entity could dissolve its ties with the U.S. shell company and revert to a Chinese entity with (1) the unlikely nature of legal action in China, and (2) the likely influx of capital that had already occurred and been used to bolster its operations.
As noted here, FCPA enforcement actions against a company based on the conduct of a Chinese subsidiary are numerous (including instances in which the Chinese subsidiary is part of the resolution process). The legal crux of the matter here is that 500.com was not a true Chinese issuer as it was not incorporated there. Practically speaking, while even if one deems 500.com to be a Chinese issuer and thus this is the first enforcement action against such an entity, this is not likely a change in focus or new enforcement objective of the SEC. Rather, it is likely the first instance of a Chinese owned, controlled, and operated company that wasn’t controlled by a major international company that responded in a thorough enough matter to allow the SEC to use its enforcement power under the FCPA, rather than using its power over access to the U.S. exchanges more generally.
