Short-Sellers vs the Chinese Reverse Merger Scam
- Joshua M Brown
- January 22nd, 2011
“The whole thing has no place to go but to blow up,” [John] Bird says. “That’s a rational position for an investor to start with — that every one of these Chinese reverse mergers is a fraud.” Executives of the companies in China, he says, are “thumbing their noses” at investors in the U.S.
I’m sure the guys running Roth Capital are just lovely and that there are tons of legitimate Chinese companies accessing US investment markets for the right reasons.
But I’m also sure that this onslaught of Chinese reverse merger companies represents the single biggest white collar crime wave in existence right now.
370 or so of these back door Chinese IPOs have raised a combined $20 billion from US investors since 2004. Due diligence has been done at a bare minimum and the financial conditions of these businesses are routinely exaggerated. The game plan is a reverse merger into a penny stock on the OTC bulletin board, followed by a jump to the American Stock Exchange (whatever the hell that is) followed by a Nasdaq listing – then comes the secondary offering.
In the meantime, gangsters mingle with grifters and persons who’ve been kicked out of the brokerage industry. Legal and accounting work is done with the intention to obscure while language barriers and geographic realities serve as tools of the fixers, expediters and bankers who are cobbling these things together.
But a rag-tag band of short-selling crusaders is emerging and taking these reverse merger China stocks to task. They are digging up credit records from foreign agencies, reconciling accounting records, suing auditing firms and even hiring private detectives to scout out purported facilities and places of business in an attempt to bolster their short theses. And they are finally breaking through as regulators are paying attention and the internet is proving to be a valuable weapon in the fight against fudging.
Your weekend reading, a magnificent article by Dune Lawrence at Bloomberg, is below.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.