Chinese Stocks Are Still in Danger of Blowing Up

NEW YORK (TheStreet) -- Chinese stocks listed on U.S. exchanges are ticking time bombs.

The Securities and Exchange Commission and FBI are all but powerless to criminally pursue their officers and even their auditors. In short, there is (almost) no one guarding the hen house. In fact, the regulatory situation is shaping up to become worse, not better. I will return regulations later but, for now, let's look at the ghosts of Chinese stocks past, present and future.

Ghosts of Chinese stocks past: Chinese stocks listed on American exchanges clearly appear regulated by well-known auditors. Unfortunately, many companies change to suit the needs of company executives more often than "face changes" in a Sichuan Opera. Since many of the Chinese companies couldn't pass or didn't want the scrutiny of an initial public offering, they often used a method called a "reverse merger."

A reverse merger is relatively simple in concept. First, find a company with an active exchange listing with little to no assets. Second, take over the company. Finally, insert the assets of Chinese company along with changing corporate name, etc. The final product is an American-listed and -traded Chinese company. First point: The SEC should never have allowed this to happen and it will soon become painfully clear why as you read further.

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Some companies are undoubtedly in it for the long haul and report filings that are correct, but many play fast and loose with shareholder assets. The merits of accusations vary; however, not the impact:

RINO International traded an average volume of a million shares a day with a share price peaking over $35. Management accusations of misdeeds resulted in investor losses. SilverCorp Metals (SVM) shares lost over 25% when Alfredlittle.com accused management of fraud. Sino Clean Energy (SCEI) lost over half its value and Deer Consumer Products (DEER) over 70% after fraud accusations.

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