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%.

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The Gooch's picture

Paging AnAnonymous...

AnAnonymous's picture

More consumption.

Consumption, the 'american' duty...

TheFourthStooge-ing's picture

More excretion.

Roadside excretion, the Chinese citizenism 'AnAnonymican' doody...

saturn's picture

More GM channel stuffing and building a factory right in China.

The Gooch's picture

Don't you have some farmland/homes to "consume" for new China superhighway? (to ghost town)

akak's picture

More offuscation, denialism, inability to self-indict, wholesale rewriting of history, overheated wok of insanitation, blobbing-up of the speeching means, the crustiest bit of the mattering thing.

The AnAnnoyingUs duty.  Just have to bear with  it.

NoDebt's picture

What does that comment even mean?  "More consumption".  We're talking about fraud, accounting, the SEC (which is supposed to PROTECT the little guy investor from precisely this sort of thing) and reverse megers of Chinese companies into the US market.  What does "more consumption" mean to that discussion?

If you're going to do something, at least put some effort into it.

Something like this, perhaps.... "Didn't seem to help HP that they DID HAVE AUDITED FINANCIALS on Autonomy when they bought them.  It was still a steaming pile of fraud.  Do you really think properly formatted audits would have made any difference in this case?"  And THEN throw-in your favorite anti-everything comments du jour.  If you want to be known as the guy who goes against the grain then at least do it well.

Big Slick's picture

"You didn't short that."

TheFourthStooge-ing's picture

Chinese citizenism audit work papers were 'accidentally' left on the roadside by an accounting intern as he paused for a relief squat. By the time this was discovered, the papers were hopelessly lost beneath a Brown Mountain 'land'slide.

overbet's picture

Yeah nice call too bad you couldnt short any of them.

hedgeless_horseman's picture



...we close the trade with a profit of 40%.

Just another Mongkok Happy Ending.

How much tax payer money did the SEC spend on its tranny sex junkets fact finding missions?

SheepDog-One's picture

Just watch out that its not actually a Mankock you hire!

Let them eat iPads's picture

Outrageous, a Thai is worth far more than a Chinese.

Big Slick's picture

Note there is no offer price for Passionate Russian, only 'Market Price'

(which means a Kalashnikov in your face afterwards and 'How much do you have left in your wallet?')


catacl1sm's picture

WHEEEE!! "I like this ship, it's exciting!" - Scotty

AgShaman's picture

Probably one of the best parts of that movie.

I'm still laughing


Rakshas's picture

HA HA .......



Metalredneck's picture

This will be the excuse for the next big recession, er, recovery.  That's what we are in, right? Recovery?

ptoemmes's picture

I dunno, possibly a decession, decovery, or depression maybe.

Rathmullan's picture

We'll show them! Let the Federal Reserve go public on the Hang Seng!

Cognitive Dissonance's picture

Better late than never...........NOT!

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

Fixed it for ya Tyler.

SheepDog-One's picture

SEC only there to draw a chalk outline and give media comments on after the fact crime scenes, and see if there's maybe any loot left laying around to steal....anyone thinking they're a preventative force of any kind are just sorely mistaken.

Nothing To See Here's picture

"You guys will regret bad-wording China when it saves the euro by merging with its neighbour Greece"

- Jim Kramer

Joebloinvestor's picture

If you think it is gonna get any better with Mary gone, think again.


Dr. Engali's picture

The regulators money can buy.

Karlus's picture

I am now long on Chinese reverse merger firms.


orangegeek's picture

Communist country strikes again.  China could always build some more empty cities with their 220% of GDP debt and hide behind that for a while.


What a mess.

earleflorida's picture

sorry... but, the Potemkin`village is built squarely on DC's Potomac 

earleflorida's picture

tyler... always, way ahead of the curve!

Bravo ZH!!!

reader2010's picture

That's how Wen Jiaobao's got his billions.

Blackfox's picture

Amsterdam is to create "Scum villages" where nuisance neighbours and anti-social tenants will be exiled from the city and rehoused in caravans or containers with "minimal services" under constant police supervision.



Urban Redneck's picture

the beatings will continue until their attitudes improve-

walküre's picture

The more things change, the more they stay the same. We had those scum villages at any time in history. The irony is that the Dutch were instrumental in societal progression and experimenting in all sorts of ways during the European cultural revolution. Now they're going back to a time before it all fell apart. Good luck with that. We could have saved ourselves alot of headaches.

ebworthen's picture

"Two years after the cattle rustlers made off with the entire herd the Sheriff and her deputies showed up to tell the rancher the following:  his fences were broken, they had seen his brand on a leather duffle, and all about the legendary dinner they had enjoyed at the steakhouse two years ago (Filet Mignon and Ribeye's half-price!)."

Downtoolong's picture

the SEC, with about a two year delay, decided to finally act tough

Pity the SEC when the next ice age comes. There is no chance they will ever be able to outrun a glacier.


ptoemmes's picture

Well, Shapiro does/did have a legacy to protect less any revolving door not swing willingly open for her:


WASHINGTON (Reuters) - Outgoing U.S. Securities and Exchange Commission Chairman Mary Schapiro delayed immediately implementing a rule to lift a ban on broader-based advertising for private placements in part because she feared it would tarnish her legacy as a pro-investor leader of the agency, internal SEC emails obtained by a U.S. House of Representatives oversight panel show.

The emails were highlighted in a letter critical of Schapiro sent to her on Friday by congressman Patrick McHenry, the Republican chairman of a prominent House subcommittee that oversees financial services, who called on Schapiro to hurry up and finalize the rule.

Pairadimes's picture

I feel so much better.

q99x2's picture

My vote is with China and not with Shapiro.

hooligan2009's picture

enquiring minds want to know if hewlett packard just engineered a reverse take over with chinese losses for autonomy, in exchange for triple chinese gains on a soon to be acquired competitor of both and whether this will be investigated by the SEC in three years time!

topspinslicer's picture

the SEC was busy with that Corzine thingy

spooncutter's picture

i figured it would take a year for the sec to catch on after your super explicit post. shouldve know it would take two

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