Fraud Investigations Hurt Chinese Companies

By Pucong Han
Columbia Journalism School
Reporter at People’s Daily Online

CleanTech Innovation, Inc, a China-based U.S. company and manufacturer of wind towers, went public, in early July 2010, through a reverse merger - a private company purchasing a public shell company, thereby avoiding the requirements of an initial public offering.

On March 2, 2011, trading in CleanTech on the NASDAQ Capital Market was suspended and had not resumed, according to a review from the U.S. Securities and Exchange Commission (SEC).

However, they continually to trade on the Pink Sheets Electronic Quotation System, while appealing the NASDAQ suspension to the Listing and Hearing Review Council. According to the Council, “it was discovered that CleanTech had failed to provide a copy of its written submission to the NASDAQ staff.” The Listing and Hearing Review Council concluded that CleanTech had intentionally withheld documents in violation of NASDAQ rules and affirmed the Hearing Panel’s decision to delist the company’s securities.

The Deputy Executive Director of the LiaoNing Provincial Government Small and Medium Enterprises Bureau, Chengfan Shan, said that CleanTech had lost more than $200 million in shareholder value after the delisting action. “[The delisting] has prevented CleanTech from participating in a $100 million job-creating project in New Jersey, part of the ‘Select USA’ program supported and advocated personally by President Obama and the Administration.”

CleanTech filed a complaint against NASDAQ Stock Market, LLC and the NASDAQ OMX Group, Inc. According to the amended complaint, CleanTech brought this action not to challenge listing or delisting actions taken by NASDAQ, but rather to challenge NASDAQ’s racially biased actions that fall outside the expertise of the SEC. The judge of the United States District Court for the Southern District of New York, Richard Sullivan, wrote, “Plaintiff raises serious allegations of discriminatory behavior by NASDAQ.”

In the amended complaint, CleanTech claims that “it has never made any late public filings with the SEC, never submitted any misleading accounting statements, was never accused of accounting irregularities or public disclosure inaccuracies by any regulatory authorities including NASDAQ, and has fully complied with all U.S. legal obligations and public disclosure requirements.”

On Jan 31, 2012, the United States District Court for the Southern District of New York dismissed the complaint voluntarily in part and involuntarily in part for lack of federal subject matter jurisdiction. The company’s lawyer, Blair Fensterstock, said, “CleanTech has voluntarily dismissed the appeal and is pursuing its rights, including its case for discrimination, before the SEC, which is pending. We would expect a decision in the next 60 days.”

According to the released memorandum, the court found that the system for reviewing disciplinary actions taken by self-regulatory organizations, like NASDAQ, is the “exclusive route” for obtaining review of actions, such as delistings. The Court disagrees that the alleged discriminatory conduct of NASDAQ resulted in the delisting.

“In fact, most of Chinese renewable energy companies launched on NASDAQ are small and medium size companies,” said Jinming Liu, the Senior Vice President of Ardour Capital Investments, LLC, Research Division. CleanTech Innovation is one of these medium size companies. “It is relatively hard and expensive for these companies to launch on the Chinese stock market compared to launching on NASDAQ through reverse takeover.”

As a result, there were a number of small and medium size China-based companies launched on NASDAQ through reverse merger in the past couple of years. Some of these companies have been under investigation for fraudulent behavior in the United States. “By alleging fraud on their blogs and websites, short sellers who knew the vulnerability of these Chinese companies were able to benefit from the share price decline,” said Liu. “If these Chinese companies were not behaving fraudulently, they should sue these short sellers to protect themselves.”

These investigations into fraud and the resulting delisting actions have hurt the reputation of China-based companies. Recent articles in the mainstream media have suggested a fraud epidemic in China. According to Liu, the consequence of such actions will lead to higher standards for China-based companies hoping to join NASDAQ.
The article has been published at http://english.people.com.cn/102774/7744865.html