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Trading in Morgan Stanley-backed stocks frozen

Trading in Morgan Stanley-backed stocks frozen

Two major companies in a prominent $1.4 billion Asia investment fund managed by New York banking giant Morgan Stanley unexpectedly told securities regulators they will not file their financial statements on time and froze trading in their stocks, actions generally considered to be cause for concern.635632800946872657-AP-Morgan-Stanley-China

The publicly traded companies, Tianhe Chemicals Group Ltd. and Sihuan Pharmaceutical Holdings Group Ltd., separately announced late last week that they would be unable to meet Hong Kong Stock Exchange deadlines because auditors have not yet signed off on their financials. Both companies pledged to cooperate with the auditors. Tianhe and Sihuan are valued at $3.7 billion and $6 billion, respectively. They are among 16 companies that comprise a private equity fund managed by Morgan Stanley & Co. LLC, known as Morgan Stanley Private Equity Asia Three, or MSPEA III. An Australian and an Indian company owned by that fund have already failed amid criminal and civil fraud allegations.

A spokesman for Morgan Stanley, Nick Footitt, declined to comment on the missed filings. A Tianhe spokeswoman also declined comment. Sihuan responded to some questions in an emailed statement but said only that the auditors needed more time and that the company was operating as usual. The twin filing delays raise uncomfortable questions for Morgan Stanley, which picked the companies from obscurity then promoted them as multibillion-dollar growth stories.

Tianhe and Sihuan could eventually receive a clean bill of health, although announcements about earnings delays due to unfinished audits are generally regarded as portending bad news. Any material problems that led to the delay would have to be disclosed once the companies file their financials. As U.S. investors increasingly consider Chinese stocks, they rely on investment banks like Morgan Stanley to keep troubled Chinese companies from reaching the market.

Morgan Stanley’s private equity team has promised investors it would perform rigorous due diligence and take stakes only in companies where it could exert influence or control. As part of its investments in the two companies, the same Morgan Stanley executive director, Homer Sun, received a seat on each company’s board.

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