This Day On The Street
Continue to site
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

Loopholes From Here to China

NEW YORK ( TheStreet) -- When allegations of fraud torpedoed the stock of China-based Rino International (RINO) last month, investor J.M. Hughes lost 56% of his investment -- or nearly $19,000 -- in less than a week.

The attack came from a short seller -- a firm betting that the stock would decline -- so at first Hughes wondered whether the source ought to be "held accountable." It turned out that the allegations were on target, and that the short seller had uncovered accounting discrepancies that U.S. regulators, auditors and exchanges had missed.

Rino came clean, acknowledging in a filing with the Securities and Exchange Commission that two customer contracts questioned by the shorts had not in fact been signed. Worse, the company said there might be problems with 20% to 40% of its other customer contracts. Rino shares, which had traded near $19 before the trouble started, dropped to $6 when trading was halted Nov. 18. The Nasdaq then delisted the stock, and Rino now trades on the Pink Sheets, recently at around $3.50. All told, investors saw more than $400 million in market value wiped out.

Today, Hughes wonders where the regulators and auditors were.

"Something that simple should have been picked up by the auditors," he wrote to TheStreet.
The Shanghai Numbers

Thousands of investors hurt by the collapse of China-based companies are raising the same kinds of questions. Blow-ups of this kind among China-based small caps have cost investors at least $34 billion, over the past five years, a study by TheStreet showed. Most of the losses relate to companies that have gained access to U.S. exchanges through a back-door process known as a reverse takeover, or RTO. Rino is one example.

The RTO process folds a China-based company into an American shell company whose stock is publicly traded. Essentially, the combination of the two companies brings the Chinese company public in the U.S. without regulatory review, allowing the promoters to avoid the regulatory scrutiny normally applied to an initial public offering or a request for a listing of American Depositary Receipts.

The increasing frequency of the blow-ups among RTOs -- together with related charges and counter-charges of fraud -- have prompted the Securities and Exchange Commission to launch an investigation. The SEC has declined to comment, but sources directly involved say the agency is asking questions about a complex web of enduring business relationships and not limiting the focus to a few isolated cases.
1 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
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
CGA $1.33 -5.00%
ONP $1.06 -7.80%
AAPL $93.24 -0.41%
FB $117.81 -0.21%
GOOG $701.43 0.82%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs