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Chinese RTOs Targeted by Interactive Brokers

BOSTON ( TheStreet) -- Chinese reverse merger companies, already under the microscope of the Securities and Exchange Commission, are now coming under scrutiny from Interactive Brokers (IBKR - Get Report) as the online brokerage is subjecting these stocks to increased margin requirements.

Interactive Brokers alerted customers to the new margin requirements on Friday, saying certain securities of companies formed by a reverse merger have elevated risk concerns. The margin requirement jumped to 50% Monday and will increase to 75% Tuesday and then 100% on Wednesday.

Some of the companies impacted by the new requirements include China Integrated Energy (CBEH), Gulf Resources (GFRE), Deer Consumer Products (DEER), Orient Paper (ONP) and Puda Coal (PUDA). In total, 47 companies are subject to the new margin requirements.

Trading on margin occurs when someone borrows money from a broker to purchase securities or sells a security short. Investors offer up other securities as collateral, which are deposited in a margin account. As Interactive Brokers is increasing the margin requirement on reverse-merger stocks to 100%, the implication is that the brokerage is now pricing in the worst-case scenario for many of these stocks.

After first coming under fire from short-sellers who stood to gain on a decline in share price, Chinese reverse mergers are now being probed by the SEC. Some Chinese small-cap stocks have plummeted as much as 75% this year, felled by the resignation of auditors to the restatement of earnings to fraud accusations by short-sellers.

Investigating Chinese Reverse Mergers

Last week, SEC Commissioner Luis Aguilar noted allegations of rampant fraud among Chinese reverse-merger companies, although he warned it will likely prove difficult for investors to recoup damages even in cases of clear-cut wrongdoing.

Andrew Wilkinson, the media contact for Interactive Brokers, says the alert, first reported on by Zero Hedge, "looks like the sort of message we'd put out. When securities get volatile, this company is not shy about putting up the margin rates."

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