I’ve not covered the wave of reverse merger frauds from China in the US since financial arcana isn’t really my thing. But here’s a solid explanation of the whole process from Caixin:
And more than 100 intermediary companies such as CUSC have been in the business of dressing up these Chinese firms for reverse mergers in America, a U.S. securities expert told Caixin. They offer information about U.S. market rules, English services and a low-cost path to high status, even for companies that had trouble in the past.
"Getting listed in the U.S. gives a Chinese company bragging rights," said a Chinese financial investor. "Given the low cost and fast process promised by intermediaries, and coupled with the fact that some of them have problematic track records in China, a backdoor listing in the U.S. sounds good."
The former CUSC employee agreed that reverse mergers have attracted many company executives because they are relatively inexpensive. A company need not spend more than a few million dollars, perhaps raised through a strategic investor, for a shell whose shares are parked in the Over the Counter Bulletin Board (OTCBB) system, and then transfer those shares to a main board.
Once newly listed, a company can start to issue reports about mergers and acquisitions in China that boost investor confidence, which can push up the stock price. Later, the company's executives and strategic investors cash out before the stock price falls.
The elegant touch is that research firms that do have either the sense or information to call bullshit take short positions on the companies concerned before spreading the bad news. It’s It’s a two way sucker stampede, with money at either end. Anyway, another datapoint for the importing external chaos theory of China’s impact on the world.
My neighbour John Hempton is, oddly, the best English-language expert on Chinese stock frauds I've ever encountered. Recommended.
Posted by: john b | June 12, 2011 at 06:11 PM
http://www.muddywatersresearch.com/wp-content/uploads/2011/06/MW_TRE_060211.pdf
From John Hempton, the above looks like interesting reading...
Posted by: Richard J | June 13, 2011 at 12:55 PM