Caveat Westerner

Rescued from the Great Blogger Crash pile:

Special report: Chinese stock scams are the latest U.S. import

The story of China MediaExpress has become an increasingly common one as U.S. investors chase the next hot Chinese stock -- only to find themselves victims of scams.



Many of the questionable Chinese companies gain access to U.S. capital markets through a back door. In what's known as a reverse merger, a private company buys enough shares of a public firm to essentially become publicly traded. That allows the company to pay a much lower fee to be listed than it would with an initial public offering - not to mention sidestep the more rigorous filing demands of an IPO.



Of the more than 600 companies that obtained entry to U.S. exchanges this way between January 2007 and March 2010, a total of 159 were from the China region, according to the Public Company Accounting Oversight Board (PCAOB). While many are legitimate, some turn out to be outright pump-and-dump schemes and other scams.



A study by financial web publication TheStreet indicated such schemes involving small-cap Chinese firms may have cost investors at least $34 billion over the past five years.



This has taken U.S. exchanges by surprise. NYSE and Nasdaq have delisted several companies and have a veritable "skid row" of more than a dozen firms that have been halted for weeks or months pending requests for information about accounting problems and late regulatory filings. (For an up-to-date list, see: here)



What are regulators doing about it? Although their stocks are traded on U.S. exchanges, the companies are based in China. That makes it unclear whose jurisdiction they fall under -- creating a regulatory void that companies can easily exploit.



On top of that, Beijing has barred America's PCAOB, established under Sarbanes-Oxley, from reviewing China-based accounting firms - even if they are registered auditors with the accounting agency.



That loophole enables Chinese companies to hire big name and no-name firms locally; as a result, they face no redress from U.S. authorities for bad practices.

You won't hear me say this often, so mark it down as a momentous occasion: U.S. regulators need more power in this situation.