U.S.-listed Chinese supermarket iFresh is being sued by the U.S. Securities and Exchange Commission (SEC) over its undisclosed related-party transactions. 

Deng Long is a Chinese immigrant from Fujian province. He founded New York Mart in 1995. In 2016, New York Mart signed a merger agreement to become a wholly-owned subsidiary of iFresh. Besides retail supermarkets, iFresh also runs two wholesale businesses. In addition, the group has supermarket chains in New York, Boston, Florida, and other places.

iFresh went public through a reverse merger with “E-Compass Acquisition Corp,” a special-purpose acquisition company listed on the Nasdaq in 2015.

After the reverse merger in 2017, the SEC pointed out that iFresh under Deng Long continued many transactions with related parties as with the New York Mart. These include business transactions by Deng Long and his brothers.

New York-based CPA Chen Qiqian told Chinese language media Da Ji Yuan that related party transactions are common, but they may impact the financial health of listed companies. This is because transactions between related parties occur in a way that non-related parties cannot do, or the transaction amounts differ from those between non-related parties. So this is like an internal transaction.

Besides, the special relationship between related parties may create a conflict of interest. For example, listed companies can transfer interests through related party transactions, thus harming shareholders’ rights and interests. So the SEC requires companies to show this information to shareholders.

 In the lawsuit, the SEC said iFresh disclosed some of these related party transactions in its public filings. For example, iFresh noted in the SEC filing that since July 2017, it had acquired several grocery stores from Deng Long, But it did not fully list all of its affiliates.

The SEC said Deng Long sometimes transferred funds between iFresh and related parties without documentation.

Many of the related parties are owned or controlled by Deng Long. And this is shown in internal records but not in public filings. 

And this problem happened during the five years from 2016 to 2020. During the time, iFresh did not disclose more than 12 million dollars paid to the Deng Long brothers’ companies.

The SEC said the stock price would be much different if investors had known about this information. The agency wants to recover iFresh’s money gained wrongfully through these transactions and impose civil penalties.

iFresh raised about 6.25 million dollars in four private offerings during the same period. However, by the end of last year, iFresh was delisted from Nasdaq for not sending in reports and not holding an annual meeting in time.

Meanwhile, many prominent Chinese giants listed on the U.S. stock exchange, like Alibaba, Baidu, and Weibo, would be kicked off the exchanges for linking to the Chinese regime and failing to disclose their financial audits, which the SEC said puts U.S. investors at risk.

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