SEC Warns on Reverse Merger Stocks
(Updated with further detail from the SEC's investor bulletin on reverse mergers.)
NEW YORK (TheStreet) -- The Securities and Exchange Commission put out an investor bulletin Thursday afternoon warning the world of potential fraud among companies that came public in the U.S. through a controversial method called a reverse merger.
Though the agency didn't single out companies hailing from China, a burgeoning fraud scandal among a raft of Chinese small-cap stocks that entered the market through the reverse merger process gave the SEC's bulletin a clear context.
For nearly a year now, short-seller reports and media exposés alleging accounting fraud (as well as outright theft of capital raised from U.S. investors) have served to make toxic the entire Chinese small-cap stock sector. The trend has accelerated since March, as a series of companies have seen their auditors abruptly resign, refusing to sign off on the 2010 financial numbers that stock issuers must file with the SEC in their 10-K annual reports. Trading in the shares of more than 15 Chinese companies have been halted or delisted. Many stocks in the sector generally have lost more than half their value year-to-date -- tens of billions in evaporated market cap.
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