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China RTO Pump-and-Dump Scam Alleged

NEW YORK (TheStreet) -- As more and more Chinese small-cap companies come under attack as fraudulent, an alleged pump-and-dump scam involving Chinese reverse-merger stocks came to light earlier this week.

According to an indictment unsealed in U.S. federal court in Detroit -- and a parallel civil suit filed by the Securities and Exchange Commission on Tuesday -- a group of promoters, stockbrokers and company executives conspired to ramp up prices in the thinly traded shares of Chinese businesses that had come public in the U.S. via reverse mergers, then dump the stocks for a profit.

Court documents claim that the conspirators made $33 million between 2005 and 2007.

Several of the stocks still trade on the over-the-counter bulletin board, where most Chinese reverse-merger companies begin life as U.S.-listed entities. Those companies include China Digital Media (CDGT), which purports to provide cable-television "operational support services" out of Kowloon, and Worldwide Biotech (WWBP), which says it's a drug developer based in the city of Xi'an.

Shanghai

The charges were the result of a three-plus-year FBI investigation, which appeared to begin with a probe into the use of spam to market stocks to potential investors.

Five of the conspirators pleaded guilty more than a year ago, in June 2009. Several of the accused, including the CEO of one of the companies named, were sentenced to more than four years in prison. In a press release, the FBI said that one of the conspirators, Alan Ralsky, "was at one time the world's most notorious illegal spammer."

The fresh indictment on Tuesday brings wire-fraud charges against Gregg Berger, a broker who worked at two investment firms during the period of the alleged pump-and-dump. Berger is reportedly fighting the charges. His lawyer, Mark Satawa, a partner at the Michigan firm Kirsch & Satawa, wasn't immediately available for comment Thursday. He was quoted by Reuters on Tuesday as saying that his client "fully intends to fight the criminal case, and looks forward to the court system vindicating his role in this scheme."

The SEC's civil complaint, meanwhile, went beyond the Department of Justice's cases. In its civil suit, the SEC is also charging four company insiders -- who were not named in the DoJ's actions -- as complicit in the scheme. They include executives and board members of three companies, including the CEO of China Digital Media.

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