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Potential fraud appears to be pervasive in U.S.-listed China space

|Includes: China-Biotics, Inc. (CHBT), CHNG, CSKI, DYP, FUQI, ONP, UTRA

Since Barron's published its expose on the U.S.-listed China reverse merger space August 28, seemingly every day a new China hybrid is blowing up.

On August 30, serious fraud allegations began to surface regarding CHBT, and they have been followed up here and here.

On September 3, CSKI lowered guidance and announced the resignation of its CFO with a very dubious-sounding explanation. The company has been publicly accused of fraudulent conduct in the past, and this announcement did nothing to help their credibility.

On September 6, DYP shares tanked after it filed an 8-K with more red flags than a Chinese army parade, including the firing of its auditors and the resignations of top management and several board members. The company held a conference call to discuss the situation this morning and apparently did nothing to assuage investors, as shares are down another 19% as I type this.

On September 10, FUQI announced it had recieved an SEC subpoena. This knocked the stock down from over $6.00 to less than $5.00 but for holders was merely a continuation of 6 month downtrend that started with the stock at $19 back in March.

Today's winner is UTA, which is tanking after fraud allegations appeared on hedge fund blog Bronte Capital. Once again while the 30% decline today has to hurt investors, the stock was already down 50% YTD.

These kind of blowups are not unkown, similar issues have arisen with CHNG and ONP to name just a couple. They seem to be coming a lot more frequently now though. The question is, how far does this go and when does it stop? I am pretty sure that among the hundreds of U.S.-listed China companies, there have to be some other frauds, especially among the reverse mergers. At the same time all this controversy also has to be depressing the multiples of some legitimate companies. As far as I know, none of the companies accused of fraud have been completely exponerated, although that could still come in the future.

Still, given the amount of alleged fraud out there and the fact that these companies fall into a regulatory loophole where U.S. authorities have no jurisdiction and Chinese authorities don't care, I can't imagine why you would want to own any of these things. Maybe if any of them started paying cash dividends or if some were acquired for cash paid to U.S. investors the clouds will lift somewhat. Investors are probably much better off sticking with the large reputable companies Chinese companies as well as companies with a dual listing in China or Hong Kong.


Disclosure: Short CHBT, CSKI, DYP, CHNG. No position in other stocks mentioned.