NEW YORK ( TheStreet) -- When allegations of fraud torpedoed the stock of China-based Rino International ( RINO) last month, investor J.M. Hughes lost 56% of his investment -- or nearly $19,000 -- in less than a week.The attack came from a short seller -- a firm betting that the stock would decline -- so at first Hughes wondered whether the source ought to be "held accountable." It turned out that the allegations were on target, and that the short seller had uncovered accounting discrepancies that U.S. regulators, auditors and exchanges had missed. Rino came clean, acknowledging in a filing with the Securities and Exchange Commission that two customer contracts questioned by the shorts had not in fact been signed. Worse, the company said there might be problems with 20% to 40% of its other customer contracts. Rino shares, which had traded near $19 before the trouble started, dropped to $6 when trading was halted Nov. 18. The Nasdaq then delisted the stock, and Rino now trades on the Pink Sheets, recently at around $3.50. All told, investors saw more than $400 million in market value wiped out. Today, Hughes wonders where the regulators and auditors were. "Something that simple should have been picked up by the auditors," he wrote to TheStreet.
- Orient Paper (ONP) shares tumbled sharply in July, when a short seller's research note alleged fraud and misappropriation of millions. Shares rebounded modestly after the company announced a positive result from an internal review aided by Deloitte & Touche. Drew Bernstein, chairman of Orient Paper's audit committee and a partner with accounting firm Bernstein & Pinchuk, said no evidence of any wrongdoing was found. Still, the stock is down nearly 40% this year.
- China Green Agriculture's (CGA) stock has plunged more than 35% this year, following allegations in June that the fertilizer manufacturer reported one set of sales and net income numbers to the SEC and a different set to the Chinese government. Requests for comment were directed to a press release issued in September, where China Green Chairman and CEO Tao Li said the company would avoid such inconsistencies in the future. China Green shares have recovered very little since Li's statement.
- Chinese specialty chemical products maker Gulf Resources (GFRE) issued a press release on Dec. 8 denouncing an "anonymous report" that called into question the accuracy of its filings to the SEC and raised due diligence concerns. The company continued to fight back with a detailed rebuttal last week. Its stock has held up well. The company declined to elaborate on the press release.
- China's insularity: The U.S. Public Company Accounting Oversight Board, or PCAOB, says it has sought to review the work of Chinese auditors but has been blocked by the Chinese government. American auditors say that their Chinese counterparts have been slow to learn American standards.
- Laxity in China: Professionals with direct experience of auditing practices and government filings in China say that corruption is a problem -- particularly the understating of revenues to keep taxes down -- and that regulatory standards are shoddy compared to standards in the U.S.
- Manpower limits: U.S. regulators lack the staff necessary to process a heavy volume of RTO deals. They rely mostly on fear of the occasional prosecution as a deterrent, but that doesn't work on entrepreneurs in China, who know that U.S. authorities can't touch them.