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Deal Wizard Meets His Match in China

Not only can water float a boat, it can sink it also. -- Chinese proverb

NEW YORK (TheStreet) -- Richard Heckmann still remembers the exhilarating wave of applause that rose and broke over him from the trading floor of the New York Stock Exchange when he rang the opening bell to celebrate a major acquisition in China.

It was May 2008, and he shared the stage with his new partner, a man he knew as Xu Hong Bin, founder of a company called China Water & Drinks. Three days earlier, Heckmann's company -- already listed on the NYSE -- had agreed to acquire China Water for more than a half billion dollars in cash and stock.

Less than a year later, Heckmann would tell the world he had been swindled, that China Water was mostly a fiction and that "Xu Hong Bin" was an alias used to conceal a criminal record. Xu has denied those charges. He is suing Heckmann in Delaware Chancery Court, claiming that Heckman owes him millions of shares of stock.

The Shanghai Numbers

Heckmann has thus joined the growing number of investors who believe they've been cheated by a special class of Chinese company, one that gains access to U.S. capital markets via a reverse merger and then -- the victims say -- lies about business operations to jack up its stock price, frequently channeling fat profits to principals and early investors, while setting late-comers up for a nasty fall.

In recent months there have been so many allegations of fraud along these lines the Securities and Exchange Commission has gone on the offensive. Sources involved in the RTO business have told TheStreet that SEC attorneys are seeking information about the international network of highly skilled promoters, investment bankers, auditors, lawyers and early-stage investors who shape and energize the reverse-merger deal flow, launching one stock after another into the U.S. equities markets. The SEC has declined to comment.

A review by analysts at TheStreet showed that investors in the U.S. have suffered losses in excess of $34 billion in RTO and similar China-based stocks. That total adds up all the market-cap losses for 150 stocks that appear to have been used to bring Chinese companies to U.S. exchanges. The list of 150 included stocks hurt by association with allegations of fraud as well as those directly implicated. Losses were measured from a stock's peak price at any time over the past five years to its present price.

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