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China Stock 'Halt Parade' Hits A-Power

For those counting, that's 23 companies that have had their shares either halted or delisted from major U.S. exchanges in the first six months of 2011 amid an ever-widening fraud scandal. The SEC has also revoked the registrations of a handful of other Chinese companies with stocks that had traded over the counter, never having uplisted to an exchange.

As reported by TheStreet in December, the SEC has been investigating allegations of widespread financial fraud at small-cap Chinese companies with stocks that trade in the United States, particularly those that came public here through a back-door process called a reverse merger.

Investigating Chinese Reverse Mergers

Before the halt on Monday, A-Power shares last traded at $1.67, having plunged from more than $10 a year ago in June. At its highest, the stock traded at nearly $27 in the summer of 2008.

The company's latest departing board members join a director who resigned earlier this month. In a press release on June 17, A-Power said Robert B. Leckie resigned because his views on "process and best practices were not necessarily shared throughout the Company." That same day, a short-seller blogger had questioned A-Power's accounting in a post published on the Seeking Alpha Web site.

A-Power didn't gain its U.S. listing through what's typically thought of as a reverse merger. Instead, the company was acquired by a so-called SPAC, short for special purpose acquisition vehicle. Also known as blank-check companies, SPACs are shells with no business operations, created by dealmakers expressly for making acquisitions, either of a private business or another publicly traded company.

Private investigators hired by investors doing due diligence have looked into A-Power before. In a 2009 report reviewed by TheStreet, one China-based investigator wrote that A-Power had misrepresented the nature of its business. Instead of a developer of cutting-edge wind-energy projects , A-Power was "in truth" a designer of small thermoelectric plants and a broker for the large state-controlled companies that actually built them, according to this report. Further, as of 2008, the year the company came public in the U.S., this investigator had found "little evidence" that A-Power was involved in any wind-energy projects, the report said.

The SPAC that acquired A-Power was set up by a firm called Chardan Capital. Chardan is run by Richard Propper, a San Diego physician turned investor who, with his son Kerry Propper, has been heavily involved in bringing small Chinese companies to U.S. capital markets over the years. Their other deals have included Origin Agritech (SEED), Hollysys Automation (HOLI), and China Cablecom Holdings (CABL).

Neither Propper was immediately available to comment.

Also playing an important role in A-Power's promotion in the U.S. was Jeffrey Feinberg, the principal of a now-defunct investment fund called JLF Asset Management, which shut down in 2008 amid the financial crisis.

Feinberg's fund made early, anchor investments in many Chinese reverse-mergers companies, giving those businesses crucial liquidity in return for cheap shares. Feinberg's other deals included China Security & Surveillance (CSR), pork producer Zhongpin (HOGS), the now-delisted ShengdaTech (SDTH), and an IT consulting company known as China Expert Technology, whose executives simply stopped filing regulatory documents to the SEC in 2007, disappearing.

After raising capital in the U.S., China Expert faced a battery of fraud allegations -- a precursor to the present environment.

-- Written by Scott Eden in New York
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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