NEW YORK ( TheStreet) -- The investigation of a pump-and-dump scheme by federal authorities has spurred regulators to kick a Chinese reverse-merger company out of the United States.

On Friday, the Securities and Exchange Commission revoked the stock registration of China Digital Media ( CDGT) as part of a settlement deal between the company and securities regulators.

According to court papers, China Digital Media's stock became wrapped up in a pump-and-dump scheme orchestrated by a number of American stock promoters, Chinese businessmen and purveyors of email spam, five of whom pleaded guilty to federal criminal fraud charges in June 2009. A grand jury in Detroit indicted another alleged conspirator on fraud charges unsealed in federal court last week.

Investigating Chinese Reverse Mergers

Also last week, a parallel civil suit filed by the SEC in a Michigan federal court sought to punish three companies and eight individuals, including company insiders as well as stock promoters. Among the people accused of pump-and-dump fraud in the SEC suit were Chi Shing Ng, who also goes by Daniel Ng, the CEO of China Digital Media, who wasn't indicted on federal criminal charges.

The cases began with an FBI investigation that started several years ago, apparently when the bureau began looking into the use of spam email to market the shares of micro-cap companies listed on the Pink Sheets or the over-the-counter bulletin board.

The suit filed by the SEC comes as the agency continues with a probe into fraud allegations that have beset the Chinese small-cap world. The agency is examining both individual companies as well as the gatekeepers who help find and bring Chinese businesses to U.S. capital markets through the reverse-merger process, including promoters, investment bankers, auditors and law firms.

The stocks named in the SEC's complaint are highly illiquid, and differ by an order of magnitude from the relatively well-capitalized Chinese stocks that are now drawing negative attention from short-sellers, the media and others. Those stocks trade on major exchanges such as Nasdaq and Amex, having uplisted from the Pink Sheets and OTCBB.

But there are some connections between the bigger reverse-merger names and the penny stocks. Based in Kowloon, a district of Hong Kong, China Digital, which purports to offer cable-television "operational support services" in the People's Republic, completed its reverse merger in early 2005. At the time, its auditor was Jimmy C.H. Cheung, who has performed audit services in the past for a roster of better-known Chinese reverse-merger companies, including China Education Alliance ( CEU), China North East Petroleum ( NEP) and Fushi Copperweld ( FSIN).

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