The Securities and Exchange Commission has charged another China-based company and its CEO with fraudulently inflating cash balances to mislead investors about the true financial condition of the company.

The SEC says China MediaExpress began dramatically inflating its reporting of its business operations, financial condition, and profits almost immediately after becoming listed in U.S. markets in 2009 through a reverse merger. The company claims to operate a television advertising network on buses within China, and falsely claimed it had Pepsi and Apple as its advertising clients, the SEC said.

Deloitte Touche Tohmatsu resigned as the company's external auditor in March 2011, along with the company's chief financial officer. The SEC's compliant says the audit firm quit when it became suspicious about fraudulent bank confirmations and statements.

The company's audit committee launched an internal investigation after the resignations. CEO Zheng Cheng offered a senior accountant on the investigative team approximately $1.5 million to “assist with the investigation,” the SEC says. The accountant refused. Approximately a month later, bank statements showed significant discrepancies between actual balances and those reported by the company. The company was delisted by Nasdaq.

The SEC says the company inflated its cash balances multiple times over. For example, the company reported its 2009 year-end balance at $57 million when there was actually $141,000 in the bank. The company reported its 2010 third-quarter-end balance at $170 million, later verified at $10 million. The company's stock price more than tripled, the SEC says, significantly sweeting Zheng's stock compensation as the company purportedly met certain net income targets.

The complaint charges Zheng and China MediaExpress with violations of the antifraud provisions of the federal securities laws and charges the company with violations of the reporting, books and records, and internal control provisions. It also charges Zheng with violating the SEC's rules prohibiting lying to auditors and making false certifications required under the Sarbanes-Oxley Act. The SEC is asking for unspecified financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

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