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China’s Shortcut To Wall Street.

By Dan Harris on Posted in Recommended Reading

Reuters just came out with an absolutely excellent investigative report on Chinese companies doing reverse mergers to go public in the United States. It is called “China’s Shortcut to Wall Street,” and if you are looking for a nice history and overview of these so-often sordid business, I urge you to check it out.

Whenever I read an article like this, I thank my lucky stars that my firm long ago made the concious decision never to get involved in these things. There was a time where we were getting contacted all the time by people soliciting our help to secure Chinese clients for these IPOs and even a few seeking our assistance on the legal side in the U.S. (which really does not make a lot of sense). When these first started coming in I consulted with a knowledgeable friend of mine his advice was, and I quote, “almost all of these guys are turds” and “you had better bring a lot of soap and water if you are going to be dealing wtih them.”

Not saying all of these guys are “turds” but I am saying that I could not be happier that I had that conversation. 

What do you think?

  • http://www.cateslaw.com/vaginal-mesh-complications JB

    Perhaps a few of these Chinese IPOs are legit but too many bad apples have ruined the bunch. There are too many cases of cooked books or just flat-out fraudulent companies and there is no way to analyze or do a proper valuation to weed out the bad ones. Until there is better transparency/regulation in Chinese financial markets, stay away. Or at least understand the risks involved.

  • My Impression

    Turds is too nice a word to describe those snake oil salesmen. I’ve seen them around China doing exactly what you said, offering up “a piece of the pie” to people who get them more suckers.

  • Mr. Clean

    “almost all of these guys are turds” and “you had better bring a lot of soap and water if you are going to be dealing wtih them.”
    Mental note: “A new soap opera based on the 1970s TV show “As the World Turns” to be called “As the World Turds”.

  • Twofish

    JB: Until there is better transparency/regulation in Chinese financial markets, stay away.
    Ummmmm…. These stocks are traded in US markets. The reason they end up in the US is because the PRC and HK regulators have been very tightly regulating those markets, and so the companies end up in the US where people think (incorrectly IMHO) that the regulation is better than in China.
    One reason Chinese companies end up in the United States is that it’s very, very difficult to raise money via IPO in China since the regulators are biased toward over-regulation rather than under-regulation. Also, Chinese companies more often than not have been victims of these sorts of scams, because they pay lots of $$$ to get a US listing that turns out to be worthless.

  • WhitieinOzz

    These guys have so much money, gained through dubious sources, they are desperate to off load it. Your friend was right, soap to wash your hands and wash their money. They have billions, all are dirty money.

  • http://www.foarp.blogspot.com FOARP

    True story.
    One night I was working out in a gym in Shenzhen when a guy comes up to me and introduces himself as the owner of a local company. After chatting for a bit the guy asks me if I know anything about AIM (the Alternative Investment Market – a loosely-regulated sub-market of the London Stock Exchange) as he was interested in floating his company on that exchange as he figured Sarbannes-Oxley made a flotation in the US excessively complex.
    I answered that I knew nothing more than I read in the papers, that I was no more than a patent engineer, and wasn’t qualified at all to give him advice on this.
    The guy then said that he’d give me 1% of the flotation value if I could set it up. Not taking this offer seriously, but interested to see how this kind of thing worked out, I contacted a NOMAD (nominated advisor – the people who sponsor floatations on AIM) who I had read about in the Financial Times and set up a meeting. I also confirmed (as best I could) that the guy did actually own the company, and that the company existed and did what he said it did.
    At the meeting things came undone pretty quickly, and it was over a very simple issue – the company hadn’t been paying some of its taxes for a number of years. The only way they could get around this was by paying the taxes back. They chose not to, and as far as I am aware, still haven’t.
    Once again, I’m not an expert on any of this, so my take on this was an amateur’s take: they just weren’t ready for the real world, but at least they were honest about their tax problems – they could have lied, fixed the accounts/documentation, and may have ended up with a successful flotation.

  • Andeli

    The lesson learned here is that numbers are worth nothing. If you (or the friend you call up)cannot take your (or his) car and go buy, touch, eat, see or use the products of the company you own, then be prepared to lose a lot of money.

  • Mark

    I’m a businessman and NOT a lawyer, so I’m about to ask a really stupid question. In fact, it’s so stupid I’d be afraid to ask it in real life.
    Don’t attorneys make a lot of money dealing with turds? If that’s a myth, why? What’s most profitable/best for international lawyers?

  • MHB

    Mark – turds don’t always pay their bills, don’t bring repeat business, can damage your reputation and can get you into trouble with the authorities (like the accountant in the article!)

  • Twofish

    Mark: Don’t attorneys make a lot of money dealing with turds? If that’s a myth, why? What’s most profitable/best for international lawyers?
    Often the attorneys are the turds. One problem with cross-border legal transactions is that if a lawyer in another country screws you over, as a practical matter you can do nothing. Yes there are procedures for dealing with dishonest lawyers, but if you are from another country you aren’t going to know them, and you aren’t going to be in the mood to hire another lawyer who might also be dishonest.
    Profitable and best are different issues. You can make a great deal of money being scum, but some of us prefer to sleep well at night.
    Also a lot of this is because in doing securities regulation, the Chinese government has tended to err on the side of overregulating whereas the US has tended to err on the side of underregulating.
    It is extremely difficult to do an IPO in China, and to get one you have be *both* a decent company and to have deep political connections, so there are a lot of decent companies that need money, and then there is this US lawyer is selling Florida swamp land.
    FOARP: Once again, I’m not an expert on any of this, so my take on this was an amateur’s take: they just weren’t ready for the real world, but at least they were honest about their tax problems – they could have lied, fixed the accounts/documentation, and may have ended up with a successful flotation.
    My impression from the story is that you are dealing with well meaning but naive people.
    The trouble is that desperate, well-meaning, but naive people are prey for the dishonest.