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.
Heckmann says that, "in an abundance of caution," he demanded that China Water set aside millions of dollars as a reserve, in case taxes were owed. Only later, as the revenue story unraveled, did he realize he had reserved millions to pay taxes on revenues that didn't exist, Heckmann says. Heckmann recalls that he spent most of 2009 and 2010 in a state of high anxiety, frantically working to salvage what he could. "I had nights and nights and nights where I laid there staring at the ceiling saying: What could we have done differently? How could you be this stupid?" he says. "But it's not that I was stupid. When I look somebody in the eye, and he tells me something, and he's an executive, I tend to believe him -- or at least believe there's some great basis to what he says, not that he's just telling me what I want to hear." Heckmann and Xu are now ensnarled in a complex legal battle in Delaware, with Xu claiming that Heckmann owes him millions in locked-up stock and Heckmann claiming that Xu defrauded him. Xu's lawyers at Cadwalader Wickersham & Taft claim that, even if the charges of fraud were true -- Xu denies them -- Xu would be entitled to the stock, under the terms of a severance contract signed by Heckmann. Heckmann's side has said that, if they win, the shares in dispute -- now counted as outstanding shares -- will be canceled. Heckmann has claimed in court papers that Xu Hong Bin is a phony name for a man with a criminal record in China. Court filings lack detail on that claim. Meantime, Heckmann says his new company is growing. There were some real customers, including Coca-Cola, and those accounts are going well, Heckmann says. The company has been buoyed by the continuing boom in China, and Heckmann believes the investors who trusted his instincts will do well, in the end. But he now takes a dim view of reverse mergers -- "I wouldn't trust one of them," he says -- and advises caution on Chinese companies generally. "If someone lies to you in the U.S., you can get him. If someone lies to you in China, you can't," he says. "I've lost my confidence that I can figure it out." -- Reported 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: firstname.lastname@example.org.