Chinese Small-Cap Stocks Start Unraveling

China MediaExpress and Duoyuan Printing listing news added to this update.

BOSTON ( TheStreet) -- Chinese small-cap stocks got walloped in the first quarter, as concerns over the accuracy of financial statements filed with the Securities and Exchange Commission drove share prices lower.

U.S. equities had their best first quarter in more than a decade, with the benchmark Dow Jones Industrial Average notching a 6.7% gain. Some Chinese small-cap stocks, on the other hand, have dropped as much as 75% this year, felled by the resignation of auditors to the restatement of earnings to fraud accusations by short sellers, who profit from a decline in share prices.

In contrast, large-cap Chinese stocks trading on U.S. exchanges as American Depositary Receipts, or ADRs, are outpacing the broader market. Baidu ( BIDU) has surged more than 40% this year, and China Unicom ( CHU) has jumped 21%. Each company is valued at more than $40 billion.

Many small-cap shares of Chinese companies gained listings on the Nasdaq and New York Stock Exchange through a back-door process called a reverse merger. Critics argue that the process allows companies based overseas to merge with shell companies in the U.S., circumventing scrutiny they would usually face by going public through a rigorous initial public offering. In the case of a Chinese reverser merger, or RTO, the U.S. shell company acquires the Chinese company, essentially taking the Chinese company public with little regulatory oversight.

In December, TheStreet reported that the Securities and Exchange Commission is investigating allegations that U.S. firms and individuals have joined with partners in China to steal billions of dollars from American investors through stock fraud involving Chinese RTOs.

Investigating Chinese Reverse Mergers

Individuals with direct knowledge of the investigation told TheStreet that the SEC is focusing on stock promoters, investment bankers, auditors and law firms that have been active in recruiting Chinese companies to U.S. stock exchanges and raising capital for those companies by selling new shares.

Months later, regulators continue to apply pressure to many of these companies. The SEC has gone as far as to revoke registrations of certain companies' securities. Meanwhile, the Public Company Accounting Oversight Board, or PCAOB, continues to pursue auditors of the financial statements of China-based companies.

On March 15, the PCAOB released a research note on audit implications for Chinese reverse mergers, following up on a previous alert by the board that found U.S. registered accounting firms weren't conducting audits of China-based companies in accordance with PCAOB standards.

"This state of affairs is bad for investors, companies and auditors alike," PCAOB Chairman James Doty said in a statement. "If Chinese companies want to attract U.S. capital for the long term, and if Chinese auditors want to garner the respect of U.S. investors, they need the credibility that comes from being part of a joint-inspection process that includes the U.S. and other similarly constituted regulatory regimes."

According to data provided by the PCAOB, Chinese reverse mergers represented 26% of all reported reverse mergers from January 2007 through the end of March 2010. By comparison, 56 initial public offerings, or IPOs, of Chinese companies were completed, accounting for 13% of all IPO activity in the U.S.

In the time since TheStreet originally reported on the dangers investors face from Chinese reverse mergers, more than 20 small-cap China stocks have fallen dramatically, costing investors millions of dollars. TheStreet has kept a running tab on the decliners, which are presented in chronological order on the following pages.

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Energroup Holdings ( ENHD.PK)

Company Profile: Energroup produces, packs, sells, markets and distributes fresh pork and processed meat products to customers in China.

Year-to-Date Share Price Move: -65%

What Caused the Decline: Energroup shocked investors on Jan. 3 after it filed a form with the SEC that terminated the registration of the company's securities from the OTC Bulletin Board. Energroup offered investors no explanation for the decision, although investors noted that the company is no longer required to make periodic filings with the SEC. The stock, which once traded above $5 in April 2010, fell below $2 around the time of the registration termination and now trade on the Pink Sheets in the U.S. for 20 cents.

Auditor: Samuel H. Wong & Co. audited Energroup's financial statements for fiscal years ended Dec. 31, 2009 and Dec. 31, 2008.


China Green Agriculture ( CGA)

Company Profile: China Green Agriculture researches, develops, produces and distributes humic acid-based compound fertilizer, as well as fruits, vegetables, flowers and colored seedlings.

Year-to-Date Share Price Move: -22%

What Caused the Decline: Another long-time target by short sellers, China Green came under renewed attack in January, when a little-known research firm called J Capital reiterated concerns that have dogged the company since last year. Then, also in January, China Green disclosed that the SEC had opened an informal inquiry into the company, as of the previous September.

China Green has denied all charges against it, including that it has overstated revenue and overpaid for a land deal in order to line the pockets of its executives. The company has hired the powerful U.S. public-relations firm Sitrick & Co., which specializes in crisis management, and issued a "10-year corporate growth plan" that targets $3 billion in annual revenue by 2020. For fiscal 2010, the company posted revenue of $52 million.

Auditor: Kabani & Co. audited the company's fiscal 2010 financial statements, finding that China Green Agriculture "did not maintain effective controls over its process to ensure the timely completeness and accuracy of the preparation and review of its consolidated financial statements."

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L&L Energy ( LLEN)

Company Profile: L&L Energy is a coal miner in China.

Year-to-Date Share Price Move: -36%

What Caused the Decline: L&L Energy's troubles trace back to December, when CNBC commentator Herb Greenberg noted that the company's CEO and founder, Dickson Lee, was once fined $65,000 by FINRA and banned from the securities industry for a year. Shares took a sharp hit on Jan. 18 after L&L Energy announced the appointment of an acting CFO to replace Rosemary Wang, who stepped down for "family reasons."

Auditor: Kabani & Co audited L&L Energy's 2009 and 2010 consolidated balance sheets. The accounting firm said it could not express an opinion on the company's internal control over financial reporting because L&L Energy "did not maintain sufficient documentation of its internal controls over financial reporting."


China Sky One Medical ( CSKI)

Company Profile: China Sky One Medical makes over-the-counter branded nutritional supplements, and plant- and herb-based pharmaceuticals and medicine.

Year-to-Date Share Price Move: -50%

What Caused the Decline: Long a target of short sellers, China Sky One has been under formal investigation by the SEC since September 2009. The commission is examining "certain of our accounting, record-keeping and disclosure practices," China Sky said in the risk-factors section of its latest 10-K annual report, filed in mid-March.

"Between that time and the present, we have received document and testimonial subpoenas from the SEC. We have complied, and intend to continue to comply with all such subpoenas. We cannot assure you that we will be able to resolve this investigation favorably, or that we will not be materially adversely affected by this investigation or its outcome."

In January, China Sky's founder and CEO issued a letter to shareholders that lamented the lack of due diligence visits to the company's headquarters and factories in Harbin, an industrial city in the far north of China, near the Russian Siberian border. "We are willing to cover your travel expenses in China," the CEO said in his letter. "'Seeing is the base of believing.'"

Auditor: MSPC audited China Sky One Medical's financial statements for fiscal years 2009 and 2010.

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China Security & Surveillance Technology ( CSR)

Company Profile: China Security & Surveillance makes surveillance and safety systems.

Year-to-Date Share Price Move: -10%

What Caused the Decline: China Security & Surveillance is one of several Chinese companies in which the CEO has offered to take the company private. On Jan. 28, Chairman and CEO Guoshen Tu announced he was mulling a going-private proposal for $6.50 a share, but the company's shares continued to drop, falling near $4 in early March.

On March 8, Tu made good on his announcement and formally offered to take China Security private in a leveraged buyout for $6.50 a share. However, the company has been slapped with several shareholder lawsuits claiming that China Security's board breached fiduciary duties to shareholders by failing to adequately shop for a better deal. At least one lawsuit noted that an analyst had an $8.60 price target on the stock prior to the going-private proposal.

Auditor: GHP Horwath audited China Security & Surveillance's 2009 and 2010 consolidated balance sheets.


Worldwide Biotech & Pharmaceutical ( WWBP)

Company Profile: Worldwide Biotech is a biopharmaceutical company that specializes in the development and potential marketing of viruses/viral vectors, bio-medicines, external diagnostic reagents, prophylactic vaccines for humans, and oral-dosage forms of traditional Chinese medicine.

Year-to-Date Share Price Move: -35%

What Caused the Decline: On Feb. 1, the SEC filed a complaint in a Michigan court that Worldwide Biotech was one of eight microcap companies headquartered in China, Canada and Israel that were part of international schemes to fraudulently pump-and-dump the securities through spam e-mail campaigns. The alleged scheme, which generated proceeds in excess of $33.6 million, was organized and devised by Francis Tribble, a stock promoter, Tribble's stockbroker friend Gregg Berger, and Chinese businessmen John Hui and Bernard Chan.

Auditor: Kempisty & Co. audited Worldwide Biotech's 2009 financial statements.

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China MediaExpress Holdings ( CCME)

Company Profile: China MediaExpress operates a television-advertising network on inter-city express buses in China.

Year-to-Date Share Price Move: -25%. Trading in the stock has been halted since March 11.

What Caused the Decline: Allegations of massive fraud beginning in early February have sent the company reeling. Its auditor, Deloitte Touche Tohmatsu, resigned in March, saying in a letter that it had "lost confidence in the representations of management (which underpin any audit)."

In perhaps the most telling development recently, China Media's largest shareholder, Starr Investment Advisors, the investment vehicle of former AIG ( AIG) chief Maurice "Hank" Greenberg, filed a lawsuit against the company and its executives, claiming they intentionally deceived Starr to bilk the fund of millions of dollars.

On Monday, China MediaExpress announced that the Nasdaq notified the company that it is "exercising its discretionary authority" to suspend trading in the stock on April 12.

Auditor: In December 2009, China MediaExpress hired Deloitte as auditor, replacing AJ Robbins PC. AJ Robbins was the company's auditor for less than two months, having been hired in October 2009.


Yongye International ( YONG)

Company Profile: Yongye International makes fulvic acid-based liquid and powder nutrient compounds used in the agriculture industry in China.

Year-to-Date Share Price Move: -28%

What Caused the Decline: A Feb. 6 story published on Seeking Alpha argued that Yongye's flagship product "probably doesn't work," and that even if it was effective, it is a commodity good "that should not generate outsized profit margins." The author also called the company's corporate structure "complex and opaque," and that its cash flow and accounts receivables raise an eyebrow.

A day later, Yongye fired back, saying the article's author "drew conclusions based inadequate research and a number of misunderstandings regarding Yongye and our products." The same author again attacked the company on March 23, claiming that Yongye's refusal to disclose any names of its distributors was suspicious.

Again, Yongye defended itself, claiming that the author of the Seeking Alpha pieces "relies on innuendo and loaded questions rather than any factual basis for his false and defamatory attacks. At the very least, the author drew conclusions based on an inadequate knowledge and misunderstanding of the company." Despite the company's rigorous defense, shares are down nearly 30% this year.

Auditor: KPMG audited the company's 2008 and 2009 financial results.

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China Digital Media ( CDGT)

Company Profile: China Digital Media is a broadcasting media and cable television operational support-services company in China.

Year-to-Date Share Price Move: The stock traded on the OTC Bulletin, although trading ended on Feb. 4.

What Caused the Decline: The SEC revoked the registration of China Digital Media's securities, which had traded on the OTC Bulletin Board and Pink Sheets. The SEC stated that China Digital Media "made materially false and misleading statements in several 2005 public filings."

Auditor: Bongiovanni & Associates audited China Digital Media's consolidated balance sheets for 2008 and 2009.


China Fire & Security Group ( CFSG)

Company Profile: China Fire & Security makes fire-safety products for the industrial fire safety market and the design and installation of industrial-fire-safety systems.

Year-to-Date Share Price Move: -0.3%

What Caused the Decline: Shares of China Fire dropped more than 10% earlier this year before the company announced on March 7 that a global private equity firm offered to take the company private. Although no buyout price was disclosed, shares rallied sharply higher. As with most leveraged buyouts, China Fire's board was swamped with threats of shareholder lawsuits that claim the board breached its fiduciary duties to China Fire stockholders by failing to take the necessary steps to maximize shareholder value.

Auditor: Frazer Frost audited China Fire & Security's consolidated balance sheet for 2010.

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China Shen Zhou Mining & Resources ( SHZ)

Company Profile: China Shen Zhou Mining & Resources explores and mines fluorite, zinc, lead, copper, and other nonferrous metals in China.

Year-to-Date Share Price Move: -43%. The stock is the most-shorted stock on the NYSE Amex exchange, according to Bloomberg.

What Caused the Decline: In early March, Shen Zhou was attacked by Absaroka Capital Management. The firm noted Shen Zhou's high CFO turnover and claimed that the company's audit committee chairman Gene Michael Bennett fabricated his employment history, overstated his educational achievements, and has been a board member for four other questionable Chinese reverse-merger companies, including Duoyuan Printing and China Agritech.

Shen Zhou quickly responded in a letter to shareholders, arguing that allegations that the company is significantly exaggerating the size of critical mines was wrong. The company also said that independent director Gene Michael Bennett did not graduate from the University of Michigan, adding that China Fire and Security mistakenly said that in its own press release. "I have done nothing wrong, and I do not believe the company has either," Bennett wrote in an email to Bloomberg.

Auditor: Sherb & Co. audited China Shen Zhou's consolidated balance sheets for 2010 and 2009, noting that operating losses, negative cash flows from operations and a working capital deficit "raise substantial doubt about the company's ability to continue as a going concern."


China-Biotics ( CHBT)

Company Profile: China-Biotics develops and produces probiotics products, which contain live microbial food supplements that the company says affect the host by improving its intestinal microbial balance.

Year-to-Date Share Price Move: -44%

What Caused the Decline: China-Biotics continues to be dogged by claims it does not have as many retail outlets in China that it claims to. But the criticism isn't isolated to U.S.-based short sellers betting on the stock's decline, as members of the Chinese media have been poking holes in the company's statements. One investigative reporter in China noted that an employee at a supermarket that sells protein probiotics said "almost no one buys this product."

Auditor: BDO Limited audited the company's financial statements for fiscal years 2009 and 2010.

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China Agritech ( CAGC)

Company Profile: China Agritech makes fertilizer products and, more specifically, organic liquid compound fertilizer products in China.

Year-to-Date Share Price Move: -49%. Trading in the stock has been halted since March 21.

What Caused the Decline: China Agritech is facing several shareholder lawsuits that allege the company's statements were materially false and misleading. One complaint alleges that the company's manufacturing facilities were idle or producing far less fertilizer than China Agritech, and that the company had misrepresented its fertilizer production levels and sales.

China Agritech dismissed its auditor Ernst & Young Hua Ming on March 14, citing doubts of the auditor's independence. The news was released on the same day that China MediaExpress announced that its auditor and CFO had resigned. The departure of Ernst & Young resulted in a delay in the filing of the company's annual report.

A week later, the Nasdaq requested that China Agritech submit a plan of compliance regarding the filing of its Form 10-K not later than March 31. On March 29, China Agritech said it has retailed BDO China Li Xin Da Hua "to assist in the investigation with respect to various accounting issues, including specific financial transactions and customer relationships."

Auditor: Crowe Horwath audited the company's financial statements for 2008 and 2009.


Subaye ( SBAY)

Company Profile: Subaye provides bundled cloud product, which includes online video, to small-to-medium sized enterprises in China.

Year-to-Date Share Price Move: -75%

What Caused the Decline: Subaye shares, which were in decline already, fell hard on March 14 after the company announced the resignation of its chief financial officer.

Auditor: DNTW Chartered Accountants, LLP audited Subaye's balance sheets for fiscal 2009 and 2010.

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China Integrated Energy ( CBEH)

Company Profile: China Integrated Energy is a non-state-owned integrated energy company in China, engaged in the wholesale distribution of finished oil and heavy oil products, the production and sale of biodiesel, and the operation of retail gas stations.

Year-to-Date Share Price Move: -67%

What Caused the Decline: China Integrated Energy has come in for an intense barrage of fraud charges by short sellers and their investigators. The company, based in the city of Xi'an in central China, has denied all wrongdoing, and has pointed out that Big Four audit firm KPMG signed off on the company's 2010 financial results as filed to the SEC.

In one of the more spectacular allegations against Chinese reverse mergers, a corporate investigator in China hired by a U.S. fund to conduct due diligence on the company spent four months perched on a hill overlooking China Integrated's main plant, surreptitiously shooting video. The video fell into the hands of a short seller, who posted it on the Internet.

Trained on the plant's only gate, the video appears to show almost zero truck activity coming and going from the factory. According to China Integrated, the plant had been running at full capacity. The only trucks arriving at the plant during those four months, the video appears to show, came when a group of investors hosted by Rodman & Renshaw went to the facility for a tour.

Auditor: The company's 2010 financial statements were audited by KPMG. A year earlier, China Integrated Energy's financial reports were audited by Sherb & Co.


Deer Consumer Products ( DEER)

Company Profile: Deer Consumer Products makes small home and kitchen electric appliances, such as blenders, food processors, choppers and juicers.

Year-to-Date Share Price Move: -37%

What Caused the Decline: A Shanghai-based short seller named Alfred Little posted several stinging critiques of Deer on his blog and the Seeking Alpha Web site in March, alleging misconduct that ranges from falsifying revenue, engaging in an accounting fraud scheme known as "channel stuffing," and making land acquisitions designed to disguise the theft of capital raised by the company in public stock offerings in the U.S.

Deer has vehemently denied the allegations. It also filed a lawsuit against Little, Seeking Alpha and ten "John Does," or the "persons currently unknown" whom Deer believes helped Little assemble his report. Together, the suit claims, they formed an illicit conspiracy to drive down the company's stock price and profit from their short positions. The suit asks for as much as $100 million in damages, "based on the artificial loss in DCPI's market capitalization that occurred from March 14-25, 2011."

Auditor: Goldman Kurland & Mohidin LLP audited Deer Consumer Products' balance sheet for 2009 and 2010. In a review of the company's internal controls over financial reporting, the auditor found that Deer's management had ineffective documentation and testing of information technology related controls over financial reporting as well as a lack of technical accounting expertise among financial staff.

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China Automotive Systems ( CAAS)

Company Profile: China Automotive Systems makes power-steering systems and other component parts for automobiles.

Year-to-Date Share Price Move: -33%

What Caused the Decline: China Automotive Systems received a delisting notice from the Nasdaq on March 17 after the company failed to file its annual 10-K report with the SEC in a timely manner.China Automotive previously announced it was reviewing the accounting treatment of convertible notes issued in February 2008.

The company doesn't expect a review to be completed until the second quarter of 2011, which is when it will file its annual report and amended quarterly reports. China Automotive has until May 16 to submit a plan to regain compliance with the Nasdaq. Following the announcement of an expected restatement of financial results, several law firms said they were investigating China Automotive for possible violations of federal securities laws.

Auditor: Schwartz Levitsky Feldman LLP audited the company's financial statements for 2008 and 2009.


Duoyuan Printing ( DYNP)

Company Profile: Duoyuan Printing is a supplier of offset-printing equipment in China.

Year-to-Date Share Price Move: -64%

What Caused the Decline: On March 18, Duoyuan Printing disclosed that the SEC has been investigating the company for fraud since October. The company received a subpoena from the SEC on November 10, according to an 8-K filing made by the company, almost two months after Duoyuan fired its auditor, the Chinese affiliate of Deloitte. The firm had raised red flags about the company's relationship to certain of its vendors and distributors, and asked to view original bank documents..

The New York Stock Exchange moved to delist the company's stock on April 4, pending an appeal made by the company, which has failed to file a financial statement with the SEC since May 2010. Duoyuan has yet to find a new auditor, but its board has hired the law firm Baker & McKenzie to lead an internal investigation into the accounting fraud allegations.

On Monday, Duoyuan Printing was banished from the NYSE.

The board's audit committee chair recently said that he expects the investigation to be completed by the end of April, "at which point we plan to engage an auditor to allow us to complete our SEC filings and fulfill the listing standards of the NYSE."

Auditor: Moore Stephens Wurth Frazer and Torbet audited the company's balance sheet for its 2008 and 2009 fiscal year.

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China Century Dragon Media ( CDM)

Company Profile: China Century Dragon Media is a television advertising company that offers blocks of advertising time on China Central Television, the state television broadcaster of China and China's largest television network.

Year-to-Date Share Price Move: -9%. Trading in the stock has been halted since March 18.

What Caused the Decline: Brought public in February, the company spent only 45 days trading before it received a preliminary information request from the NYSE Amex on March 22.

Less than a week later, China Century disclosed that MaloneBailey had withdrawn its audit opinions and formally resigned on March 22, the NYSE Amex had issued a delisting notice on March 23 and the SEC was investigating. MaloneBailey said it found discrepancies noted on customer confirmations and its inability to directly verify the bank records. These irregularities "may be an indication that the accounting records have been falsified," the company disclosed.

Auditor: China Century Dragon engaged MaloneBailey as the company's independent accountant in April 2010.


Orient Paper ( ONP)

Company Profile: Orient Paper produces and distributes printing paper, uncoated and coated paper, corrugated paper, plastic paper, graphic design paper, and other paper- and packaging-related products.

Year-to-Date Share Price Move: -28%

What Caused the Decline: Orient Paper waged battle with short seller Muddy Waters Research through much of 2010. Muddy Waters accused the company of fraud and misappropriation before Orient Paper's audit committee ultimately determined its accounting was clean after a long investigation.

However, Orient Paper shares failed to recoup much of the decline suffered at the hands of the short attack. The stock fell anew on March 23 after the company disclosed that its 2008 financial results were audited by a firm that didn't have an accounting license.

"We are not aware of any other information at this time which leads us to believe that our financial statements for 2008 are materially incorrect in any way," Orient Paper CEO Zhenyong Liu said in a statement.

Auditor: BDO Limited audited Orient Paper's 2009 and 2010 financial statements.

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Fuqi International ( FUQI)

Company Profile: Fuqi International designs and sells a range of precious metal jewelry and luxury goods in China.

Year-to-Date Share Price Move: -57%

What Caused the Decline: Nasdaq booted the company's stock to the Pink Sheets on March 25. The company has been delinquent with its regulatory filings since the September quarter of 2009 and had used up all its extensions.

A formal investigation of the company by the SEC has been ongoing since at least September, when Fuqi said in an 8-K filing that it had "recently" received a subpoena from the commission "for certain documents, relating to its failure to timely file required periodic reports, as well as other matters."

Despite its troubles, Fuqi said it expects to apply for a re-listing on Nasdaq "at such time as the company is able to comply with all requirements for initial listing."

Auditor: Stonefield Josephson audited the company's financial statements for 2007 and 2008.


NIVS IntelliMedia Technology Group ( NIV)

Company Profile: NIVS IntelliMedia designs and sells audio- and video-consumer products, including digital audio systems, televisions, digital video broadcasting set-top boxes, and DVD players.

Year-to-Date Share Price Move: -2%. Trading in the stock has been halted since March 24.

What Caused the Decline: On March 28, NIVS IntelliMedia announced that it was delaying the filing of its annual report after auditor MaloneBailey resigned because of what it characterized as "illegal acts involving the company's accounting records and bank statements and discrepancies in accounts receivable."

Auditor: MaloneBailey audited the company's 2009 financial statements. Kempisty & Company was NIVS IntelliMedia's previous accountant, having audited the company's balance sheet in 2008.

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A-Power Energy Generation ( APWR)

Company Profile: A-Power provides onsite distributed power-generation systems and micro power grids for industrial companies in China and also manufactures wind turbines.

Year-to-Date Share Price Move: -14%

What Caused the Decline: On March 28, A-Power postponed its conference call for its full-year results until "later in 2011." The company said the postponement "was not due to any accounting irregularities and will allow the company and its independent auditors to complete their work on the financial statements and audit." Still, the stock fell sharply on the announcement.

Auditor: MSCM LLP audited A-Power's 2009 consolidated balance sheet as well as the company's internal controls over financial reporting. MSCM found that A-Power "did not maintain effective control over financial reporting as of December 31, 2009 due to pervasive control deficiencies and material weaknesses."


China Intelligent Lighting & Electronics ( CIL)

Company Profile: China Intelligent Lighting makes light-emitting diode (LED) and other lighting products for the household, commercial and outdoor lighting industries in China.

Year-to-Date Share Price Move: -22%. Trading in the stock has been halted since March 24.

What Caused the Decline: On March 29, China Intelligent Lighting rocked investors after disclosing that its auditor, MaloneBailey, resigned on March 24 "due to accounting fraud involving forging of the company's accounting records and forging bank statements." The same day, the NYSE Amex issued a preliminary information request and the SEC served the company a subpoena for documents as part of a formal, nonpublic investigation.

Auditor: AJ Robbins PC was the auditor in 2009, before the company engaged Kempisty & Company at the time of its reverse merger in January 2010. Within two months, China Intelligent Lighting dismissed Kempisty as its accountant and hired MaloneBailey.

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Universal Travel ( UTA)

Company Profile: Universal Travel offers packaged tours, plane tickets and hotel reservations for sale through its Web site.

Year-to-Date Share Price Move: -33%

What Caused the Decline: On March 29, Universal Travel postponed its 2010 full-year earnings conference call, although the company said the delay is "not due to any accounting irregularities and will allow the company and its independent auditors to complete their work on the financial statements and audit."

Universal Travel was the target of a short seller attack in September, after Bronte Capital's John Hempton wrote on his blog that the Chinese company may be committing fraud. Hempton is short the stock and would benefit from a decline in the share price.

"The online booking engine is dysfunctional -- and the massive margins that it claims (84 percent for plane tickets) are thus also dubious," Hempton wrote on his blog.

Auditor: Acquavella, Chiarelli, Shuster, Berkower & Co., LLP audited Universal Travel's consolidated balance sheets for 2008 and 2009. Its audit found that Universal Travel did not maintain effective internal control over financial reporting, as the company's policy documentation of all controls identified during their assessment and remediation process was incomplete. In addition, the auditor found that there was a lack of technical accounting expertise among financial staff regarding U.S. GAAP and the requirements of the PCAOB, and regarding preparation of financial statements.


China Electric Motor ( CELM)

Company Profile: China Electric Motor sells micro motor products, which are incorporated into consumer electronics, automobiles, power tools, toys and household appliances.

Year-to-Date Share Price Move: -36%

What Caused the Decline: On March 31, China Electric Motor delayed the filing of its annual report, citing "possible discrepancies concerning the company's banking statements that were very recently identified by the company's auditors."

Auditor: AJ Robbins was engaged as China Electric's auditor on Oct. 11, 2007. The company dismissed AJ Robbins and hired Kempisty & Co. on May 6, 2009. China Electric then fired Kempisty on Feb. 10, 2010 and hired MaloneBailey.

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AgFeed Industries ( FEED)

Company Profile: AgFeed Industries sells animal-nutrition premix, concentrate and complete feeds business and commercial hog production business in the United States and China through its operating subsidiaries.

Year-to-Date Share Price Move: -36%

What Caused the Decline: On March 31, AgFeed said in a regulatory filing that it will restate its statements of operations for the three and six month periods ended June 30, 2010 and June 30, 2009 for an expense reclassification. "This change will have no impact on the previously reported net income or earnings per share," the company said in the filing.

The restatements are being made in order to reclassify losses on disposal activities of breeding sows and other assets to operating expenses, AgFeed said.

Auditor: McGladrey & Pullen, LLP audited AgFeed's consolidated balance sheet for 2010. The auditor found material weaknesses in the company's internal controls over financial reporting. McGladrey & Pullen found that management used a third party service provider to prepared financial statements, although the third party failed to identify all necessary GAAP adjustments. In addition, the auditor found that AgFeed had ineffective controls over monitoring of the adequacy of accruals over payroll-related expenses at the hog companies.

-- Written by Robert Holmes in Boston with contributions from Scott Eden in New York.

>To contact the writer of this article, click here: Robert Holmes or Scott Eden.

>To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet.

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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