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

The Nasdaq declined to comment specifically on China Energy Savings Technology, but noted that there have been no allegations of fraud brought against newly listed companies since 2006. Kara Brockmeyer, an assistant director with the SEC, declined to comment on China Energy Savings beyond what was disclosed in documents published by the SEC.

The exchanges have requirements that control the activities of their own staff, as well. Staff are not permitted to trade in stocks that are seeking a listing. While there have been no flagrant conflicts of interest among staff, shorts have called attention to staff entanglements that raised questions, particularly for Nasdaq. The exchange declined to discuss those entanglements, treating them as a personnel matter.

The Pros Look to the SEC

Wall Street professionals tend to downplay the importance of the exchanges in guarding against fraud. Professionals point out that the securities traded on a major exchange must be registered with the SEC. They look to the SEC for oversight.

"[Chinese companies] have to go through a registration process with the SEC. That means that they have to have U.S.-approved accounts," said one seasoned Wall Street pro familiar with the problems of RTOs. "That's the first step. It has nothing to do with the exchanges."

Problems with audits coming out of China are of particular concern. Wall Street professionals are skeptical about audits done in China, questioning both the skill and the integrity of auditors there.

Knowledgeable pros are apt to bring up the case of China Expert Technology (CXTI), where audited financial statements portrayed a robust and growing business in 2006.

"The auditors signed off and certified $175 million in revenue over a four-year period, and none of it existed. Not an iota of it," says Laurence Rosen, managing partner of the Rosen Law Firm in New York. The firm represents unhappy shareholders. "In some cases, the customers didn't even exist."

Attempts to reach the company for comment did not succeed. The company appears to have ceased operations. The stock is still traded occasionally, but last traded at $0.01 a share.

The SEC didn't act on China Expert Technology until Oct. 1, 2007, when it announced a temporary suspension of trading in the company's securities. While the commission noted questions about the accuracy and adequacy of China Expert's financial statements at the time, no fraud charges were ever filed. Rosen says he understands why. His firm later won a default judgment against China Expert, a judgment that Rosen believes to be virtually worthless.

"All of the assets are in China. The people are in China. I can't so much as serve a subpoena in China," Rosen says. "You can't get any discovery in China. The SEC would be completely blocked from any regulatory action against a Chinese person or entity. What can they do? Nothing."

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

>To follow Robert Holmes on Twitter, go to

>To submit a news tip, send an email to:


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
7 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
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
CGA $1.84 0.00%
ONP $1.71 0.00%
AAPL $112.92 0.00%
FB $89.73 0.00%
GOOG $637.61 0.00%


Chart of I:DJI
DOW 16,654.77 +369.26 2.27%
S&P 500 1,987.66 +47.15 2.43%
NASDAQ 4,812.7080 +115.1720 2.45%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs