Greenberg: Exchange Listings Not a Seal of Approval

As Chinese reverse mergers and IPOs in the U.S. come under increased scrutiny, here's something to ponder: Any kind of listing on an exchange is not the equivalent for the Good Housekeeping Seal of Approval.

Example: Seattle-based L&L Energy , which is in the business of acquiring coal mines in China, announced two weeks ago it has been elevated to the Nasdaq Global Select Market from the Nasdaq Global Market. The announcement, coincidence of coincidences, came a day after I appeared on "The Strategy Session" mentioning the dubious backgrounds of several of the company’s top execs.

In its press release, L&L—originally created as a shell seeking a business —made it sound as though its elevation to the “select” market held some kind of significance. Parroting what the Nasdaq itself says, L&L trumpeted: “The Nasdaq Global Select Market has the highest initial listing standards of any exchange in the world based on market value and financial requirements ...”

L&L didn’t stop there. CEO Dickson Lee was quoted in the same new release saying: "We are proud to have qualified for the NASDAQ Global Select Market. This move is a significant milestone of our progress and indicative of our commitment to generating value for our shareholders. We believe inclusion in this top tier of companies reflects our commitment to accretive growth and vision to become a global coal company."

Just one problem: Listing on the Nasdaq Global Select Market—or any exchange—has nothing to do any verification of the quality of a company’s earnings, cash flow or balance sheet.

“No stock market in the U.S. does an independent audit of the financials of companies,” a Nasdaq spokeswoman told me this morning. “We, NYSE, Amex rely on published financial statements. To the extent we have reason to question those, we will ask questions.”

And get this: A company doesn’t even have to apply to be upgraded to the “select” market; it gets upgraded automatically from the Nasdaq Global Market if it meets listing requirements on such things as market cap, stockholders equity and revenue —all of which can be a moving target, especially for some of these companies.

A review process that lasts from October through December determines which companies make the upgrade. In the last go round, 216 companies saw their listings upgraded as of Monday's trade date. The Nasdaq, for what it’s worth, did not issue a press release to mark this momentous occasion.

The only silver lining: Inclusion in the Global Select Market gets a company into the Nasdaq Global Select Market Composite, which can give its stock an artificial boost as it becomes part of the index. In my mind, that makes it a stock promoter's dream.

My point: Buyer beware. Just ask investors in China Sky One Medical , one of last year’s crop of upgrades, which has disclosed having received multiple subpoenas from the SEC.

Ditto for investors in Fuqi International, also on the "select" market, which received a de-listing notice from the Nasdaq after failing to file financials with the SEC for several quarters. It is pleading to remain listed. Nasdaq has granted the company an extension until March 28 to get in compliance—or else.

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