Two Years Too Late SEC Wakes Up To Chinese Reverse Merger Fraud; Closing Chinese Fraudcap Basket With 40% Profit

Tyler Durden's picture

Moments ago the SEC, with about a two year delay, decided to finally act tought, and in a parting present to the most ineffective and clueless chairman of the coopted and corrupt organization ever seen, that would be Mary Schapiro of course, lashed out at Chinese affiliates of Big Four accounting firms as well as BMO, for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors. Of course, readers of Zero Hedge will recall what we dubbed the formation of a cottage industry exposing Chinese fraudcaps back in November of 2010 when we warned that virtually every reverse merger out of China will soon prove to be a fraud, but because of the listing fees that US exchanges would get as a result of local listing, nobody cared, and only that now extinct class of gullible and naive investors would lose their entire investments. It is now two years and one month later, and the SEC has finally acted on it.

From the SEC:

The Securities and Exchange Commission today began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.

 

The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:

  •     BDO China Dahua Co. Ltd
  •     Deloitte Touche Tohmatsu Certified Public Accountants Ltd
  •     Ernst & Young Hua Ming LLP
  •     KPMG Huazhen (Special General Partnership)
  •     PricewaterhouseCoopers Zhong Tian CPAs Limited

According to the SEC’s order instituting the proceedings, SEC investigators have been making efforts for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the U.S. The audit firms have refused to cooperate in the investigations.

 

"Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

 

An administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms. The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order.

Yeah, whatever.

Here is the documented bottom line: on June 24, 2011 we presented a full list of all fraudcaps in "Complete List Of All Chinese Reverse Merger Companies." In that post, fully aware the SEC would do absolutely nothing to end the party until it was too late, we said:

to make readers' lives easy in creating a new and improved Chinese short basket, below is every single Chinese company which began trading through a reverse merger on the NYSE and Nasdaq. Sooner or later, 99% of these companies will be trading at $0.00, although neither the cash strapped Nasdaq, nor the irrelevant NYSE will ever refund listing fees to the soon to be defunct companies. In the meantime, creating a short basked from all of these names is easily a good repeat of a slow bleed trade.

Those who did as we said, and shorted the entire presented basket have made a profit of over 40% in under 12, and under 18 months through today (the basket excludes 7 stocks which have been delisted and gone bankrupt since our short recomendation).

Of course, those who read our November 2010 post, and acted preemptively before we explicitly said what to do, have made a return of 70%.

Now that the SEC is finally involved, and proves it is simply the world's most incompetent regulator conceivable, we close the trade with a profit of 40%.