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Greenberg: SEC Goes After Chinese Reverse Mergers

The SEC hasn’t formally announced a widespread investigation of Chinese reverse mergers, but Commissioner Luis Aguilar suggested as much in a speech Monday in Washington.

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Among Aguilar’s key points:

-The rise in reverse mergers involving companies from China and elsewhere is a “disturbing trend.”

-Unlike a traditional IPO, there is no underwriter performing due diligence.

-The transaction gives the formerly private company the credibility and access to capital of being registered as a public company, without any of the vetting from underwriters and investors that companies undergo when they perform a traditional IPO.

-Notwithstanding the SEC rulemaking of a few years ago to respond to abuses involving shell companies, “we are seeing increasing problems. While the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have significant accounting deficiencies or being vessels of outright fraud.”

-“As just one example of this phenomenon, two companies that were numbers one and two on the Investor’s Business Daily 100 have now been shown to have significant issues.”

-There appear to be systematic concerns with the quality of the auditing and financial reporting.

-Even though these companies are registered here in the U.S., there are limitations on the ability to enforce the securities laws, and for investors to recover their losses when disclosures are found to be untrue, or even fraudulent.

-An additional problem with these backdoor registrations is that there may be difficulty in prosecuting violations.

You can read the entire speech here.

My Take: This subject is no stranger to CNBC viewers or readers of my column. A bigger problem, not addressed by the SEC, is whether the stock exchanges—eager for listings—are feeding the frenzy.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter: @herbgreenberg

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