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.
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."
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.