Why Is Kingtone Ringing Nasdaq's Bell?

NEW YORK (TheStreet) -- When Tao Li, the chairman and founder of tiny Kingtone Wirelessinfo (KONE), rings the opening bell for the Nasdaq Stock Market on Monday, it could amount to an awkward moment for the equities exchange.

That's because Li, who hails from the city of Xi'an in central China, is also the chairman and founder of China Green Agriculture (CGA), a controversial reverse-merger company, and one of the first to draw the suspicions -- more than a year ago -- of short sellers and private investigators, who say they've unearthed evidence that the company may have committed fraud.

China Green, whose stock is listed on the New York Stock Exchange, not Nasdaq, has disputed the allegations made against it. But the Securities and Exchange Commission has nevertheless seen fit to launch an inquiry into the company. Since September, the agency's regulators have been conducting an "informal inquiry" into China Green, which completed its reverse merger in 2007. (The exact nature of the inquiry hasn't been disclosed; the SEC has declined to comment and China Green has only said that it's cooperating with the agency.)

The China Green probe is, however, part of a much broader investigation by the SEC into the possibility of widespread accounting and stock fraud at a raft of small Chinese companies that have sold equity in the U.S. over the last five years or so, according to people with knowledge of the investigation. Most of these companies have gained stock registrations in the U.S. through the controversial (but legal) reverse-merger process. Critics say the process is sometimes abused by dubious stock promoters and company executives who want to dodge the stricter due-diligence inspections that regulators use to examine straight-forward IPOs. Defenders say reverse mergers are an efficient and cost-effective way to help small companies raise needed funds.

The regulatory heat on reverse merger companies from China in particular has been so intense this year that Nasdaq has just recently moved to make it harder for reverse-merger stocks to gain listings on its exchange -- a development first reported by TheStreet last month.

And yet Nasdaq has chosen to invite Tao Li to its podium in Times Square. An exchange spokesman declined to comment on the matter, except to say, in a prepared statement, "Market open and close ceremonies are visibility opportunities for our listed companies and other organizations including non-profits as well as for individuals such as entertainers, athletes and politicians."

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