Richard Heckmann is one of a growing number of investors who believe they've been cheated by a special class of Chinese company, one that gains access to U.S. capital markets via a reverse takeover, or RTO.
Certainly Kitt has deep experience. He helped engineer one of the first China-based RTO deals in 2005. That company was called China BAK Battery ( CBAK). In that instance, Roth later helped arrange PIPE deals with Kitt and others, company filings with the SEC show. Like many other RTO companies, China Battery has failed to live up to advance billing. The stock peaked at about $12.50 10 months after the reverse merger and now trades at around $2. The reverse merger for China Water was completed in May 2007. Several weeks later, Pinnacle took the lead in providing $30 million in capital in return for 22.4 million shares. In January 2008, Roth arranged another round of funding -- this time $50 million -- from a group led by Goldman Sachs ( GS). Both deals are described in SEC filings and a prospectus later issued by Heckmann Corp. Goldman declined to comment. Heckmann says that Pinnacle, Roth and Goldman Sachs all did their own due diligence on China Water & Drinks. He absolves Roth Capital, Pinnacle, and Goldman Sachs. "If I thought for a second they knew anything, I'd be all over them. I'm not a guy who's gonna sue people I believe to be innocent," he says. For his part, Byron Roth is philosophical about his friend's travails. "It just got through us," Roth says of his own firm's due diligence efforts. "It appears that China Water was a very sophisticated fraud that passed not only our due diligence filters, but also those of the other qualified professionals involved." Barely a month after the $50 million round of financing with Goldman, Roth was introducing Richard Heckmann to Xu Hong Bin. Company filings with the SEC show that the introduction came in late February 2008, at Roth's annual "Orange County Conference," a lush affair at the Ritz-Carlton in Laguna Beach, featuring serious panels by day and serious parties by night. The rapper Snoop Dog performed at the conference in 2006, Ludacris the next year, Billy Idol in 2010. One Roth party in New York had the New York Post buzzing about scantily clad Asian models, each painted with the ticker symbol of a company whose shares Roth had underwritten.