NEW YORK (TheStreet) -- From its headquarters on the Avenue of the Stars, not far from Beverly Hills, a little-known investment firm called WestPark Capital has long promised to make the dreams of Chinese entrepreneurs come true.The firm has billed itself as one of the most innovative boutique investment banks involved in helping small Chinese companies travel across the Pacific in pursuit of riches on U.S. equity markets. Several years ago, WestPark even invented a special breed of reverse merger, marketed as a way for companies to avoid the perceived dirtiness of most kinds of reverse mergers, but still attain public listings "fast." Now, for a handful of WestPark's clients and their investors -- and probably for WestPark itself -- those dreams have devolved into horror shows. Over the last week and a half, exchange officials have halted the trading in four Chinese companies brought public by WestPark onto the NYSE Amex: a pair of consumer-electronics makers named NIVS IntelliMedia ( NIV) and China Intelligent Lighting and Electronics ( CIL), which were founded by the same brother-sister team and which share head offices in the same corporate park; along with China Century Dragon Media ( CDM), a television advertising producer, and China Electric Motor ( CELM), which manufactures micro motors. All are located in or near Shenzhen, a city on the other side of the water from Hong Kong. It's an area that has long held a reputation for organized crime and illicit activity in general, including financial fraud. (NIVS, China Intelligent Lighting and China Century didn't respond to requests for comment. China Electric's CFO spoke with TheStreet in an interview, described in Part 2 of this story.) WestPark has thus become ensnarled in a much larger trend. Since before the financial crisis, more than 150 companies hailing from the People's Republic have gone public in the U.S. via reverse mergers, and allegations of fraud have beset so many of them that the entire RTO practice has become tarred. Still, the four trading halts, which came in quick succession over the last two weeks of March, were remarkable enough that a speech by SEC Commissioner Luis Aguilar on Monday, in which he called Chinese reverse mergers a "disturbing trend," referred to the four companies in its footnotes. WestPark denies that its involvement with the four companies has anything to do with the problems they've encountered. In a statement prepared in response to a list of queries made by TheStreet, the firm made pains to distinguish between its brand of reverse merger and the standard kind, saying its version requires as much regulatory scrutiny as a traditional IPO. The problems encountered by the companies are "not about the structure or the means through which they became public," WestPark said in the statement. Instead, the firm said the whole issue can be traced to another source.
It all started, according to MaloneBailey's Qin, when the firm instituted a more-rigorous process for examining Chinese companies for the fiscal 2010 audit cycle.As allegations and revelations of fraud hit one Chinese reverse-merger stock after another last year -- often brought to light by short sellers who profit when share prices decline -- the resulting scandals sparked the SEC and its auditor regulator, the PCAOB, to launch a broad inquiry into the matter. The SEC set up a task force to investigate fraud allegations directed at Chinese reverse-merger companies, and to examine the role of the U.S.-based firms that help bring them public here -- the so-called gatekeepers -- including promoters, investment banks and auditors. No such firms have been accused of wrongdoing by federal officials. The scene, however, has intensified this year, with explosive fraud allegations and company-specific SEC probes leading to a handful of trading halts and/or delistings, such as China MediaExpress ( CCME), Duoyuan Printing ( DYP) and Fuqi International ( FUQI). (Defenders of Chinese listings in the U.S. maintain that the incidence of fraud among Chinese companies is no greater or lesser than it is among American companies. Still, of the 13 stocks with trading halts currently in place on major U.S. exchanges, nine are Chinese -- or 70% of them.)
|MaloneBailey's head of China auditing, George Qin|