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China Fraud Plot Thickens With Fake SEC Suit

The SEC hoax drew such immediate interest from followers of China stocks because it seemed as though U.S. securities regulators had turned their attentions away from the companies accused of fraud -- and toward their accusers.

Since last year, the SEC has been conducting an investigation into Chinese small-cap stocks, based in part on claims made by short-sellers, who place bets that make money when share prices decline.

The fake complaint against Block attempted to use familiar SEC legal lingo to paint a picture of short-seller fraud and stock manipulation -- one in which short-sellers concoct evidence of fraud against companies out of thin air and then sell those reports to hedge funds ahead of making the allegations public on the Internet.

Several Chinese companies have made similar charges against their short-seller critics, going so far as to threaten litigation, including a small-appliance maker called Deer Consumer Products (DEER) and, just on Monday, the micro-motor manufacturer Harbin Electric (HRBN). A long-promised leverage buyout of Harbin has attracted many doubters, including a short-seller whose tactics are similar to Block's, even after Monday's announcement that the company's board had signed a definitive agreement to sell Harbin to a group led by its founder.

Yet another embattled Chinese company, Sino Clean Energy (SCEI), has not only filed suit against its short-seller critics, but promised to distribute a rather unique form of special dividend. If Sino Clean wins its litigation and obtains a judgment or settlement against its short-side adversaries, the company said in a recent press release, it intends to pay out that windfall to its shareholders.

Investigating Chinese Reverse Mergers

-- Written by Scott Eden in New York

>To contact the writer of this article, click here: Scott Eden.

>To follow the writer on Twitter, go to http://twitter.com/ScottEden.

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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