China RTO Stocks Slide After China Media Bombshell

(Chinese reverse merger article updated from March 15.)

NEW YORK (TheStreet) -- A day after China MediaExpress (CCME) revealed that its former auditor believes the company is worthy of an investigation into possibly dubious accounting practices, a handful of small-cap Chinese stocks sold off sharply on Tuesday.

Fraud allegations have buffeted share prices among these names since last year, as more of the investing public begins to doubt the integrity -- rightly or wrongly -- of financial statements emanating from the People's Republic.

Of course, on Tuesday, the nuclear crisis in Japan and the broad and vicious slide in equities around the world didn't help Chinese small-cap names.

But more than a few of those stocks, most of which came public in the U.S. through a controversial process called a reverse merger, declined by more than 6% on heavy volumes during Tuesday's trading session. Many have been in the public eye before, accused of financial chicanery of one sort or another by short sellers.

Shares of China Sky One Medical (CSKI), for example, a controversial maker of traditional Chinese homeopathic medicines, fell by as much as 21% before ending the session at $4.50, down 8%.

American Oriental Bioengineering (AOG), a competitor of China Sky's, issued poorly received first-quarter results Monday, earning a downgrade from Brean Murray, which is an accomplishment, since Brean Murray is one of a few small U.S. investment banks that do a robust business in the raising of capital and selling of shares in Chinese small-cap companies. The firm, in other words, has an interest in being bullish on Chinese stocks. AOB's beaten-down stock finished Tuesday at $1.83, surrendering 18%.

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Then there was China-Biotics, the Shanghai-based maker of yoghurt cultures, long suspected by short sellers of fictionalizing part of its business, including the number of retail outlets it has owned. (China-Biotics has denied all charges.) For the second time since the beginning of the year, the company has been the subject of an unfavorable investigative article in the Chinese press. This time it was the China Economic Review, an English-language monthly published out of Hong Kong, which posted on its web site a piece entitled "China-Biotics: The Numbers Don't Add Up." The stock declined 4% Tuesday.

Elsewhere, Telestone Technologies (TSTC), a network equipment maker which was aided in its reverse merger by a longtime promoter of Chinese stocks named S. Paul Kelley, surrendered 9% on no news.

Similarly, the small-cap beer brewer China New Borun (BORN), which went public through the front door in an initial public offering, dropped more than 18% before recovering Tuesday afternoon. The stock closed at $10.22, down 4.5%. China Education Alliance (CEU), another beaten-down name, waylaid by accusations of skullduggery, ended the Tuesday session by sinking 14% to $1.50 on more than double the daily average trading volume. The only news? The company, which sells Internet-based educational materials, had "successfully hosted" its third-annual "China Middle School Students Academic Abilities Competition" in Beijing. According to the company's press release, 300,000 grade schoolers attended.

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