1 in 10 reverse mergers of Chinese firms on US stock exchanges "fraudulent"
March 17, 2011 - At least 10% of Chinese companies that
have gone public on stock exchanges in the United States are engaged
in fraud. The deals often involve establishing offshore holding
companies in the British Virgin Islands, Cayman Islands, Samoa or
another offshore jurisdiction in order to conceal illegal conduct.
The startling claim, following extensive research, was made to OffshoreAlert by
Sharesleuth.com, an investigative news web-site controlled by well-known American businessman
Mark Cuban.
"Upwards of 400 Chinese companies have gone public on U.S. exchanges through reverse mergers," says
Chris Carey, Editor and President of Sharesleuth.com. "We've identified at least 40 deals – or fully 10 percent – that have involved some degree of fraud or deception.
"We
recently turned up two Chinese reverse mergers in which the U.S. shell
companies were controlled by close relatives of people who previously
operated boiler-room brokerages that defrauded investors of millions of
dollars. Given those connections, why would anyone want to invest in
those companies?"
Investors
who have been flocking to buy Chinese stocks on U. S. exchanges need
to up the quality of their due diligence to avoid losses, Mr. Carey told
OffshoreAlert.
"The
presence of so many middlemen with previous SEC or FINRA violations
should be an obvious red flag for investors and regulators," he says.
"Just because a stock is listed on a U.S. exchange does not mean it has
been thoroughly vetted, or that it has any sort of seal of approval.
"The
question has been asked time and again – if these companies are so
promising, why are they going public through the reverse merger route
and associating themselves with so many questionable individuals and
firms?
"The
impetus for investing in Chinese companies is growth. But how can an
individual investor – or even an institutional one – confirm that the
reported sales and earnings are real? Geographic barriers, language
barriers, cultural barriers and an overall lack of transparency combine
to make due diligence extremely difficult.
"The
structure of most Chinese reverse-merger companies creates a sort of
"perfect storm'' for subterfuge. Although the companies are listed on
U.S. markets, their business operations are in China and their holding
companies are in a third country, creating a maze of regulatory and
jurisdictional conflicts that make it difficult for American
authorities to pursue investigations abroad."
Chris Carey, Editor and President of Sharesleuth.com,
and others will discuss how to vet Chinese reverse-merger deals,
starting with the shell companies and deal promoters and continuing to
the companies themselves, at the 9th Annual OffshoreAlert Conference, which will take place at The Ritz-Carlton, South Beach in Miami Beach, Florida on April 4-6, 2011.
During
the session, you will learn how to spot red flags, how to perform
deeper research on the Chinese companies, and how to acquire and
analyze Chinese tax filings and other documents to compare reported
sales and earnings in SEC filings against reported sales and earnings
for the underlying businesses overseas.
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