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L.A. Firm's China Ventures Turn Sour (Pt. 2)

Stocks in this article: NIV CIL CDM CELM

Rappaport is well known in Chinese investment circles for creating his own reverse-merger process, something he calls a WRASP, short for "WestPark Reverse Alternative Senior Exchange Process." The firm has even trademarked the acronym.

The technique is similar to a standard reverse merger, except that it allows for a company to immediately have its equity listed on a major stock exchange, rather than living for some liminal period in the penny-stock purgatory of the OTCBB or the Pink Sheets.

First, WestPark registers a brand-new shell company, as opposed to acquiring one that already exists, according to securities lawyer David Feldman in his seminal text on reverse mergers, Reverse Mergers (Bloomberg Press, 2009). A so-called Form 10 shell, or "virgin shell," the vehicle is a form of "blank-check" entity, albeit one without any shareholders or trading history. Usually, when WestPark conducts the merger between the Form 10 shell and the Chinese company, it will also arrange a private placement, selling stock in the still-private company to a small group of investors. After registration statements are filed, and either the Amex or Nasdaq approves the stock's listing, WestPark (sometimes joining with other, larger banks) will underwrite a public offering of shares, according Feldman's text and WestPark's own description of the process. As such, WestPark says, a WRASP has as much regulatory oversight as an IPO.

"It is a complete misconception to classify these transactions as 'backdoor' reverse mergers," WestPark said in a statement sent to TheStreet in response to a list of queries for this story. "Unlike the backdoor listing model," the firm continued, "the WRASP process requires our client companies to undergo full SEC review, subject themselves to diligence by the respective exchange, be declared effective by the SEC and receive an NOL short for No Objection Letter from FINRA BEFORE any trading in the stock is done."

All four of the now-halted stocks were WRASPs coordinated by WestPark. But don't call that a pattern, says WestPark. One of the firm's spokesmen, Jeff Mustard, told the TheStreet, "This is one of those fabulous, circumstantial-evidence cases where all these dots can be artificially connected."

Moreover, Mustard said, reiterating the firm's prepared statement, "WestPark relies on the facts and figures given to them by the auditor.... This is an auditor's story."

WestPark was responsible for the original reverse mergers of the four companies, but the firm later had help in underwriting the public offerings of three of them -- NIVS, China Intelligent Lighting and China Electric Motor -- from a pair of U.S. investment banks with long histories in selling Chinese small-cap stocks. Rodman & Renshaw (RODM) was the co-lead underwriter for stock offerings by NIVS and China Intelligent in 2009 and 2010, respectively. Roth Capital took the lead role in China Electric Motor's public offering in February 2010, raising $22.5 million.

Roth Capital declined to comment. Rodman & Renshaw didn't respond to a request for comment.

Executives and PR representatives of NIVS, China Century and China Intelligent Lighting didn't respond to requests for comment.

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