The Securities and Exchange Commission has filed a subpoena enforcement action against Deloitte Touche Tohmatsu’s member firm in Shanghai seeking documents related to an investigation of possible fraud by a longtime client, Longtop Financial Technologies Limited.

According to the SEC’s application and supporting papers that were filed in a federal district Court in Washington, D.C., the SEC issued a subpoena on May 27, and Deloitte & Touche Shanghai was required to produce the documents by July 8. The SEC said D&T Shanghai possessed "vast amounts of documents" related to the subpoena, but has not produced any documents to date. As a result, the SEC said it is unable to gain access to information that it considers critical to an investigation that has been authorized for the protection of public investors.

A Deloitte Touche Tohmatsu Limited spokesperson declined to comment. "DTTL does not believe it would be appropriate to comment on the SEC’s application to require DTTL’s China Member Firm to produce documents, other than to note that Chinese law prohibits Deloitte China from providing the requested documents directly to a foreign regulator," said spokesperson Lauren Mistretta. "Deloitte China is caught in the middle of conflicting demands by two government regulators, and DTTL hopes that this matter will be resolved in a timely and sensible matter."

The Public Company Accounting Oversight Board has been pressing Chinese regulators for greater access to auditing firms in China in order to uncover the types of problems found with Longtop's accounting. The PCAOB recently met with its Chinese counterparts to try to resolve differences over allowing its inspectors to gain access to U.S. firms' affiliated audit firms in China, which perform audits of companies whose shares trade on U.S. stock markets. Further meetings are planned. The subpoena enfocement action against Deloitte's Shanghai member firm is the most serious action to date against such a firm.

According to the court papers filed by the SEC, D&T Shanghai had until recently been Longtop’s auditor, since at least 2007, and the firm agreed to have its audit reports for Longtop filed annually with the SEC, knowing full well that the audit reports would be relied upon by U.S. investors. On May 22, D&T Shanghai resigned as Longtop’s auditor after discovering numerous improprieties during an audit for the year ended March 31, 2011.

In its resignation letter, which was included in a Form 6-K furnished by Longtop on May 23, D&T Shanghai identified numerous indications of financial fraud at Longtop and noted that D&T Shanghai’s prior-year audit reports for Longtop could no longer be relied upon by investors.

As part of the Longtop investigation, the SEC staff issued and served the subpoena on D&T Shanghai seeking production of documents related to the incomplete audit of Longtop for the year ended March 31 along with prior-year audits that D&T Shanghai completed. These documents may reveal information about D&T Shanghai’s discovery of false financial records at Longtop, how any fraud schemes at Longtop were able to continue undetected, and basic information necessary to ferret out whether there was a fraud, who was behind it, how significant it was, and how it was conducted, said the SEC.

The SEC’s court papers noted that Longtop is a foreign private issuer whose American depositary shares traded on the New York Stock Exchange from the date of its initial public offering in October 2007 until May 17, 2011, when the NYSE halted trading prior to delisting Longtop’s securities last month. When trading was halted, Longtop’s shares were priced at $18.93 per share with 57 million shares outstanding, resulting in a market capitalization of approximately $1.08 billion.

Pursuant to its application filed in court, the SEC is seeking a court order directing D&T Shanghai to show cause why the court should not enter an order requiring D&T Shanghai to produce documents responsive to the subpoena.