Both organizations report that the existing regulations are effective in screening out a number of weak applicants. On the other hand, one insider confided "it's not always going to be water tight."

The case of China Energy Savings Technology illustrates how master manipulators can circumvent such requirements.

Manipulators Beat the Nasdaq

The story of China Energy is a case study in RTO fraud, fully documented in reams of paperwork relating to fraud charges brought by the SEC in 2006. The agency has since obtained final judgments against five executives associated with the company. All were held to be liable for fraud. The judgments require the executives to pay more than $30 million.

When the promoters behind the company originally sought to uplist with the Nasdaq in 2004, they knew they needed a base of at least 400 shareholders as well as an active market in the company's shares.

According to the SEC, they acquired the necessary shareholders through a stock giveaway orchestrated by a promoter named Jason Genet. He was paid in shares. They then pumped up the trading volume with a special offer: China Energy Savings would grant one additional share of stock for every share purchased on the open market by an existing shareholder. Because this offer was not disclosed to the SEC and to the public, it was illegal, the court decided.

Both the shareholder base and the trading volume materialized out of thin air. Having met the Nasdaq's requirements, the company gained a listing on Nasdaq and issued new stock in what the SEC dubbed a "pump and dump" scheme, taking about $25 million from investors. Meantime, Genet and others in the company's inner circle were selling, according to the SEC's complaint.

The first hints of China Energy's elaborate scheme came to light in the spring of 2006. Abruptly, all of the leading officers of the company quit, the company's headquarters in Hong Kong was shuttered, and its phones lines were disconnected. The company's collapse was documented by the SEC in court. On May 19, 2006, the Nasdaq delisted China Energy Savings' stock. Shares that had once traded as high as $28 were soon worth less than 50 cents.

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