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The Securities Arbitration Law Firm Of Klayman & Toskes Launches Investigation Concerning The Sale Of Reverse Merger Entities By Brokerage Firms

The Securities Arbitration Law Firm of Klayman & Toskes (“K&T”),, announced today that it is investigating the sales practices of Financial Industry Regulatory Authority (“FINRA”) brokerage firms that sold shares of “reverse merger” entities to its retail and institutional clients. The U.S. Securities and Exchange Commission (“SEC”) is examining disclosure and accounting issues regarding Chinese companies that listed on U.S exchanges through reverse mergers. The SEC issued an investor bulletin regarding reverse mergers stating “there have been instances of fraud and other abuses involving reverse merger companies” and that investors “should be careful” when considering buying these companies’ stock. A survey issued by the Public Company Accounting Oversight Board stated that from 2007 through March 2010, 159 Chinese companies listed in the U.S. through reverse mergers. As of March 2010, these companies had a total market cap of $12.8 billion.

The SEC has halted trading in a number of reverse merger entities, including Heli Electronics (Other OTC: HELI.PK), China Changjiang Mining & New Energy (Other OTC: CHJI.PK), RINO International (Other OTC: RINO.PK), Advanced Refractive Technologies (Other OTC: ARFR.PK), HiEnergy Technologies (Other OTC: HIET.PK), and Digital Youth Network (Other OTC: DYOUF). The SEC suspended trading in these companies because either questions had arisen regarding the accuracy and completeness of information contained in their public filings, or there was a lack of current and accurate information about the companies because they had not filed certain periodic reports with the SEC.

In addition to trading suspensions, the SEC revoked the securities registration of several reverse merger companies. After the SEC revokes a company’s securities registration, no broker, dealer or national securities exchange can execute a trade in the stock unless the company files to re-register its stock.

K&T is investigating whether brokerage firms who sold stocks of reverse merger companies performed adequate due diligence into the companies prior to recommending the companies’ stock. Moreover, under FINRA Rules, before recommending a security to a customer, a brokerage firm must perform an analysis to determine whether the security is “suitable” for the investor. In many instances, purchases in reverse merger companies were unsuitable for the investors, which resulted in significant losses.

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