$1.4B Morgan Stanley fund frozen; Trading halted in overseas asset.

• Author: Horwitz, Jeff
• Position: Business

Byline: Jeff Horwitz

WASHINGTON -- The University of Michigan, defense contractor Lockheed Martin Corp. and a foundation helping Appalachian children all own stakes in an overseas investment fund backing two major Chinese companies, which recently froze their stocks and missed financial reporting deadlines.

The American organizations invested in the $1.4 billion fund -- managed by New York banking giant Morgan Stanley -- for their endowments or retirement funds, parts of which could be at risk amid news that auditors have yet to sign off on the Chinese companies' books.

Those delays sometimes mean accounting troubles are ahead, which could put the investments in jeopardy. But the companies declined to explain the reasons for the unusual delays, and would say only that the auditors' work wasn't finished.

''This is not something an auditing firm would do lightly,'' said Paul Gillis, a former partner for PricewaterhouseCoopers in China who teaches accounting at Peking University. ''There are only two reasonable explanations for being late: One is management incompetence. Two is they're fighting with the auditors.''

''And neither one of those is good,'' he said.

The millions of dollars the American investors have placed in the fund account for only a small part of their financial portfolios, so the potential risk is small. But as U.S. investors increasingly consider Chinese stocks, they are reliant on banks like Morgan Stanley to guide their decisions and keep troubled companies from reaching the market.

The twin filing delays also raise new questions for Morgan Stanley, which picked the companies from obscurity and then promoted them as multibillion-dollar growth stories.

The publicly traded Chinese 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. 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, known as Morgan Stanley Private Equity Asia 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 this story. A Tianhe spokeswoman also declined to comment. Sihuan responded to some questions in an emailed...