SEC Shuts Down Multiple Chinese Companies Listed on U.S. Stock Exchanges and Investigates Their Practices

In 2010 the SEC’s Corporate Finance and Enforcement divisions began a wide-spread investigation into small cap Chinese companies that became public in the United States through a process referred to as “reverse mergers.” The SEC is also investigating the individuals in the U.S. who helped orchestrate these reverse mergers. A reverse merger is also commonly referred to as a reverse takeover or RTO.

In a RTO, a Chinese company is acquired by an American shell company. An American shell company is a company which already has stock trading on a U.S. public exchange, but the company does not operate a business or own assets. The Chinese company merges into the shell. This way, the Chinese company is brought public in the U.S. without the regulatory scrutiny of the Initial Public Offering (IPO) process.

The SEC has found accounting inaccuracies in many of these companies. Companies listed on a U.S. stock exchange are required to maintain and submit audited financials by a firm registered with the Public Company Accounting Oversight board. According to the SEC’s Chief Accountant, hundreds of Chinese companies brought public in the U.S. through the RTO process were using small, largely unknown auditing U.S. firms, who in turn may have been contracting the work back out to local Chinese firms.

The SEC has accused many of the Chinese companies listed on U.S. stock exchanges as engaging in pump and dump scams and other fraudulent practices.

In a lawsuit brought by the SEC on February 1, 2011, it charged eight individuals and three RTO companies – China Digital, Global Peopleline and m-Wise – in a $33 million fraud. The SEC alleges that defendants engaged in schemes to pump up the price and trading volume of the securities, luring investors into the market and driving up the demand in the stock price by false statements and by painting an unrealistic picture of the companies’ business prospects. The defendants then dumped (sold) millions of shares of these securities into the market making millions of dollars in profits, leaving unsuspecting investors with nearly valueless shares.

Other examples include China Energy Savings Technology, Fuwei Films, and China Water and Drinks. After being listed on U.S. exchanges, these companies are painted with allegations of fraud.

This month, U.S. exchange trade officials have halted the trading in four Chinese companies brought public by WestPark Capital. WestPark Capital is a prominent investment bank and brokerage firm based out of California. WestPark brought the following four Chinese based companies public to the NYSE Amex: NIVS IntelliMedia (NIV), China Intelligent Lighting and Electronics (CIL), China Century Dragon Media (CDM), and China Electric Motor (CELM). According to, the audit firm claims to have found evidence that employees at each of these four companies forged bank statements and SEC filings, presumably to inflate their income statements and/or assets on their balance sheets.

If you lost money in a Chinese company stock listed on a U.S. stock exchange, contact the law firm of Blum Law Group for a free consultation about potentially recovering your investment losses. Blum Law Group is investigating the U.S. financial institutions, accounting/auditing firms and other professionals who brought these Chinese companies to the market. Blum Law Group is a national recognized securities litigation and arbitration law firm which represents investors worldwide, typically on a contingency fee basis (no recovery, no fee).

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