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
, 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
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