With the overheated growth of the Chinese economy, many U.S. investors, eager to cash in, have dabbled in Chinese stocks listed on U.S. exchanges.
The problem is Chinese companies may be keeping two sets of books-one for Chinese financial regulators and a bogus set for the Securities and Exchange Commission and investors here in the United States.
Despite this frightening backdrop, it’s easy to understand why investors are tempted to chase riches from China. China is the “Next Big Thing” for investors, or so they want to believe. They will miss out unless they plow their money in RIGHT NOW, their brokers implore.
This type of hype chillingly reminds us of other “Big Things” that have blown up investors’ portfolios.
We all remember the “new paradigm” for buying the stocks of technology companies that made no profits. What resulted was the great Tech Wreck of 2000.
We all remember the claim that real estate values would defy history and gravity and continue their climb ever-upward. That flight of fancy led to the 2007-2008 popping of the mortgage bubble, which gave us the Great Recession, the effects of which are still with us today: 8% unemployment and a double-dip recession in Europe.
Recent events force the question: Is China the next disaster for investors?
Investors from the United States look like they are going to lose the $100 million they invested into a Chinese coal company in 2010 called Puda Coal (NYSEMKT:PUDA). A handful of small, obscure investment banks floated that offering but managed to overlook one major point. According to a recent story in the New York Times, the chairman of Puda Coal transferred a key interest in the coal mining company in 2009 and then turned around and sold that interest to a state-owned Chinese company.
What is truly appalling is how easy it would have been for the investment banks and the auditors to discover the fraud, according to the Times. In fact, the fraud was hiding in plain sight.
“It was basically spelled out in documents that were publicly available in China months before the American and Canadian investment banks, advised by major law firms, raised the money from the investors,” the Times reported. “But it appears no one bothered to look - not the underwriters and not the auditors.”
So, investors who bought Puda Coal on the NYSE Amex exchange spent $12 per share in its IPO for a company that had already been looted by its principals, according to civil fraud charges in February by the Securities and Exchange Commission.
It looks like justice will not be served in the Puda coal matter. According to the Times, the United States is powerless when it comes to protecting investors from the likes of the executives at Puda.
“The two men charged by the SEC are evidently in China and have no intention of coming to the United States to face the allegations,” Times columnist Floyd Norris reported. “Most likely, there is nothing the commission can do and there is probably nothing Puda investors can do.” Once valued at $12 per share, the stock’s share price on Monday was hovering below 30 cents.
The lesson? Investors must be vigilant and focused on the risks of foreign investments. And brokers and investment banks should stop pushing Chinese stocks where fraud is hiding in plain sight.
Disclosure: Zamansky & Associates are securities attorneys representing investors in arbitration and federal and state litigation against financial institutions and other companies, including Chinese companies.