On Monday, the Securities and Exchange Commission charged the China-based oil-services company, Sinotech Energy Ltd ADR (PINK:CTESY). and its top executives with allegedly lying about the company's assets and use of its $120 million IPO proceeds.
In 2010, Sinotech Energy Ltd ADR (PINK:CTESY) went public with an offering priced at $8.50. It didn't fare very well with the stock dropping 19 percent; it has continued to lose its value. Today, the stock is listed as a pink sheet company, CTESY, and is trading at 0.027.
In a separate charge, SinoTech's chairman has been accused of stealing $40 million from the company last summer through the corporate bank account according to The Wall Street Journal.
The SEC has alleged that SinoTech "grossly overstated" its primary operating assets value in a financial statement and it did not purchase enough lateral hydraulic drilling units as listed in its IPO registration. In addition, the agency said that Chief Executive Guoqiang Xin and former Chief Financial Officer Boxun Zhang had been responsible for the fraud.
The company had its shares halted in August after the website AlfredLittle.com posted a research report that alleged Sino-Tech's biggest customers and suppliers were probably shell companies. The unsigned report was coincidentally written by investors who shorted the stock as noted at the report's end.
After trading resume, the shares continued to fall.
Reverse Merger Invasion
SinoTech is just one of many Chinese companies that has been recently accused of fraud. In one well-known case, Sino-Forest, a Chinese plantation operator listed on the Toronto Stock Exchange, imploded after research firm Muddy Waters accused the company of fraud synonymous to the Madoff Ponzi case.
Hedge fund manager John Paulson held a major position in his fund and reportedly lost up to $700 million from the implosion.
While Sino-Forest entered the fray in 2011, Chinese companies listed in the United States via "reverse mergers" have been topics of many stories thanks to allegations by investors of accounting irregularities.
According to a report by Reuters, a "mini-ecosystem" of short sellers emerged last year and made money by shorting these companies; more than 25 of them had been delisted by the U.S. stock exchanges during March and August.
Muddy Waters revealed the irregularities and frauds and recently published a report, based on articles from a Chinese newspaper, that exposed a "school for fraud" in China. It says that the "school," which is an investment firm based in China, has taught businesses how they can cook their books, forge tax receipts, sales contracts and bank and official documents as a means to get investors' money.
The "school" also has a pool of auditors, suppliers and customers for hire to deceive possible investors of its legitimacy. According to the report, "The fraud school also arranged for its clients to prepare for investor site visits by renting inventory, temporary labor, and trucks."
Through the years, numerous Chinese companies have listed themselves on U.S. stock exchanges through the purchase of U.S.-based shell companies, who have been previously listed. However, after U.S.-based short sellers and research firms have reviewed the finances, red flags had been raised.
One company on this list? Sino-Forest.