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SEC Probes China Stock Fraud Network

Short investors often get embroiled in heated public debates with long investors who are betting on the success of the Chinese companies whose shares they own. Defenders of Chinese investment opportunities caution that fraud and stock blow-ups are common in any volatile sector, often coinciding with exciting growth stories.

"We've had less fraud with Chinese companies than we've had with similar-sized U.S. companies," says Peter Siris. Siris runs Guerrilla Capital, a hedge fund. The fund has invested in some 150 Chinese businesses that have come public on America exchanges, many through reverse mergers.

Siris argues that a lot of the accusations percolating through the sector have been trumped up by short investors to increase the value of their own positions. He concedes that inexperienced Chinese executives have made what he calls innocent mistakes as they learn how to become good corporate citizens in the U.S.

Crocker Coulson, whose investor-relations firm represents some 50 Chinese companies, acknowledged that there has been financial chicanery by some reverse merger companies. Coulson said that the attention given to the bad seeds is overblown and that "people have seized on that to go out and attack high-quality companies that have done nothing wrong -- on thin evidence." Coulson and many others on Wall Street have faith that the Chinese economy will continue to reward investors with rapid growth.

Lawyers experienced in the litigation of securities fraud cases believe that the current investigation by the SEC could well come to nothing in the end, leading into the same quagmire that has frustrated a lot of American investors. Ultimately, the truth about the operations of Chinese companies lies in China, where U.S. regulators lack authority.

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-- Reported by Scott Eden and Robert Holmes in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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