This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

SEC Probes China Stock Fraud Network

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player

"American investors deserve high-quality and independent financial reporting so that all market participants can trust the accuracy of the audit work for U.S. publicly-traded companies," the letter said. It was signed by Reps. Chris Lee of New York and Spencer Bachus of Alabama, who will take up his new role as chairman of the Financial Services Committee in January. The rest of the letter communicated a broad concern about fraud among China-based companies.

Until now, many investors buying China-based stocks traded on U.S. exchanges have felt abandoned by regulators.

To date, Wall Street has seen only one major SEC prosecution in the sphere. That was the case of China Energy Savings Technology -- the subject of yesterday's action.

Three China-based reverse merger companies so far have disclosed current SEC investigations: China Sky One Medical (CSKI), Fuqi International (FUQI) and Rino International (RINO). China Sky One Medical has conceded inaccuracies in filings in China in a press release. Fuqi has received a delisting notice from the Nasdaq, but has not yet been delisted. Rino recently admitted that some of its claims about contracts were false, and Nasdaq has delisted that stock. China Sky One and Rino declined to comment for this article. Through a spokesman, Fuqi said it is "fully cooperating with the SEC" and that it has no further comment.

Sources with knowledge of the current SEC investigation say that the commission has shown interest in at least six additional companies. The agency's interest is not focused narrowly on individual cases, informed sources have told TheStreet. Rather, enforcement officials seem to view individual cases as manifestations of a systemic problem.

Reverse mergers -- sometimes called reverse takeovers, or RTOs -- are perfectly legal in the U.S., and have been used in the past to give birth to solid public companies, including the parent company of the New York Stock Exchange itself. If there is a flaw in the process, the flaw is that it allows stock manipulators to circumvent regulatory scrutiny.

The process is complex. First, the sponsors find a Chinese company with a plausible growth story and sell the founders on the idea of raising capital in the U.S. They then gain control of a U.S. company that is little more than a shell, but a living shell, with stock that remains listed on a public exchange in the U.S. The U.S. company buys the Chinese company, essentially taking the Chinese company public in the U.S. with little regulatory oversight. The sponsors and company founders can then use optimistic growth projections to float new issues of stock among American investors eager to participate in the economic miracle of China.

3 of 7

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
NYX $0.00 0.00%
FFHL $0.70 -3.29%
NDAQ $49.32 2.20%
AAPL $130.34 -1.70%
FB $80.65 -1.50%

Markets

DOW 18,093.89 +55.92 0.31%
S&P 500 2,114.46 +5.54 0.26%
NASDAQ 5,055.2170 -5.0290 -0.10%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs