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SEC in Fraud Probe of China RTO Duoyuan Printing

Stocks in this article: DYP CGA FUQI CSKI CCME

NEW YORK ( TheStreet) -- Duoyuan Printing (DYP) disclosed Friday that the Securities and Exchange Commission has been investigating the company for fraud since October.

The small-cap Chinese manufacturer of printing equipment, which originally gained a stock listing in the U.S. through a 2006 reverse merger, received a subpoena from the SEC on November 10, according to an 8-K filing made by the company Friday, almost two months after Duoyuan made the unusual decision to fire its auditor. It has been out of compliance with its SEC filings ever since.

News of the formal investigation sent the company's stock down 20% Friday to $1.66.

According to Duoyuan's 8-K, regulators are examining a list of alleged misconduct, including whether Duoyuan "had engaged in fraud in the sale of securities, had filed materially false documents with the SEC, had failed to maintain adequate books and records, and had failed to maintain an adequate system of internal accounting controls, and whether the Company's principal officers had made false certifications regarding the Company's financial statements, and had engaged in deceit in dealings with the Company's external auditor."

The company said it had hired Baker & McKenzie to conduct its "internal investigation," which is ongoing.

Also, because it hasn't filed a financial report with the SEC since May 2010, the company faces a possible delisting by the New York Stock Exchange.

The disclosures come as the SEC continues with a broader investigation into Chinese small-cap stocks, particularly those that came public in the U.S. through reverse mergers. Sometimes called a reverse takeover, or RTO, the process doesn't receive the same level of regulatory scrutiny as a traditional IPO.

Investigating Chinese Reverse Mergers

Sparked by a raft of fraud allegations and revelations among Chinese reverse-merger companies, the SEC set up a task force last year to look into the issue. Investigators are examining individual companies as well as the role of the so-called "gatekeepers," firms that help find and bring Chinese businesses to U.S. capital markets, including stock promoters, auditors, law firms and investment banks.

Since the beginning of the year, the issue has intensified as several high-profile Chinese reverse-merger companies face implosion. Most recent has been the case of China MediaExpress (CCME), which disclosed this week that its CFO, audit firm and one of its key independent board members had resigned amid accusations of massive fraud.

The SEC has declined to comment on the matter, but according to people with knowledge of the probes, the agency has been examining at least a dozen individual companies. It is unclear what will come of these investigations, if anything.

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