TWO former senior employees of UOB Kay Hian Private Limited (UOBKH) were charged on Wednesday for allegedly lying to the Monetary Authority of Singapore (MAS) in relation to reports on a then Catalist aspirant. Lan Kang Ming, 38, and Wee Toon Lee, 34, each face three charges of providing MAS with false information in October 2018 in relation to due diligence reports on an unidentified company applying to list on the Catalist board of the Singapore Exchange. MAS said in a media statement on Wednesday that it was performing an onsite inspection of UOBKH between June and August 2018, to assess the latter's controls, policies and procedures in relation to its role as an issue manager for Initial Public Offering (IPOs). During the examination, Lan and Wee were said to have provided different versions of a due diligence report relating to background checks on a company applying to be listed on the Catalist board of the Singapore Exchange. UOBKH had acted as the issue manager
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Caixin Online
11 June 2011
A spacious office in downtown Shanghai’s Citigroup Tower quickly fell silent two months ago after a U.S. Securities and Exchange Commission (SEC) probe started targeting the tenant’s clients.
Packing up in haste were executives and staffers at China U.S. Strategy Capital Group Ltd. (CUSC), a so-called intermediary firm that helped Chinese companies qualify to list on U.S. stock markets through reverse mergers.
A big player in a tight-knit group of special stock market advisors in China, CUSC operated from the Shanghai skyscraper and its office in Los Angeles for six years before closing shop. Other club members include small U.S. investment banks such as Roth Capital Partners, Halter Financial Group, ARC Investment Partners, none of whom agreed to Caixin interview requests.
“There is too much fraud involved,” explained a former CUSC employee who declined to give his name. “Now everyone knows the trick. Of course, (our) company could not last.”
Before the stock-trading trick came to light, the process of listing through reverse mergers was popular among Chinese companies with support from intermediaries as well as accounting firms, three-fourths of them U.S.-based. Some intermediaries and accountants apparently participated in, knowingly or unknowingly, cooking books and defrauding investors.
An SEC task force is now investigating companies that took the reverse-merger route to the stock market as well as certain intermediaries and accountants that may have manipulated financial reports.
So far, it appears CUSC is not a direct target of the probe. But at least 18 Chinese firms tied to the scheme have stopped trading on U.S. bourses since March, and another four have been forced to delist from the major boards.
On stock markets, investors in Chinese companies have turned skeptical toward reverse-merger players, stoking share price volatility. Nasdaq’s China Index of listed Chinese companies, for example, fell 9.8 percent between May 2 and 29 after climbing 18.4 percent between March and May 1.
Meanwhile, stock exchanges have started changing rules to weed out tricksters. Nasdaq officials recently announced tighter regulations for reverse merger listings, including a six-month probation for newcomers.
And in China, some intermediaries including CUSC have simply disappeared.
Helping Hands
The reverse merger process has given companies an easy and largely opaque means for listing on U.S. stock markets without an expensive and complex initial public offering. A company can float shares simply by buying the shell of an idle company, and then assuming its stock rights.
Three times more Chinese companies listed on U.S. markets through reverse mergers than through IPOs between January 2007 and March 2010, according to the Public Company Accounting Oversight Board (PCAOB), a U.S. non-profit organization. A PCAOB report said Chinese companies accounted for 26 percent of U.S. reverse merger deals signed during that period.
Most reverse merger players are small companies. The combined marketization of all Chinese companies listed through reverse mergers is less than half the share value of companies that have taken the traditional listing route, PCAOB said.
And more than 100 intermediary companies such as CUSC have been in the business of dressing up these Chinese firms for reverse mergers in America, a U.S. securities expert told Caixin. They offer information about U.S. market rules, English services and a low-cost path to high status, even for companies that had trouble in the past.
The former CUSC employee agreed that reverse mergers have attracted many company executives because they are relatively inexpensive. A company need not spend more than a few million dollars, perhaps raised through a strategic investor, for a shell whose shares are parked in the Over the Counter Bulletin Board (OTCBB) system, and then transfer those shares to a main board.
Once newly listed, a company can start to issue reports about mergers and acquisitions in China that boost investor confidence, which can push up the stock price. Later, the company’s executives and strategic investors cash out before the stock price falls.
“Usually you will see (a stock’s) price rise rapidly for a few days, which means institutions are preparing for an escape,” said the former CUSC employee.
Intermediaries who help with reverse mergers can profit from the stock market as well. CUSC, for example, sometimes offered free services to clients in exchange for stakes as high as 30 percent, said an investment professional who dealt with the firm.
To work the magic and avoid pitfalls, an intermediary often works quietly. Most are small Chinese firms without an office address and few names on the payroll. Aware of the risks involved in the reverse merger game, these companies regularly change names, especially when working with different clients.
Intermediaries make money even when a reverse merger project fails. Less than 20 percent of Chinese companies that buy a shell company have actually reached the main board, said a financial investor. The rest have found their shares locked inside the OTCBB system, with little or no trading, even though they paid the intermediary fees.
Sometimes, a lack of capital prevents companies from successfully transferring to the New York Stock Exchange.
“NYSE requires a market valuation of more than US$ 100 million for a company to transfer,” said Yang Ge, the NYSE chief representative in Beijing. “Most companies listed in OTCBB have valuations smaller than US$ 100 million. A high threshold can prevent small companies with low quality from entering NYSE.”
Data Gap
But many companies that took the reverse merger course have enjoyed quick success. Investors have snapped up stock based on reports of rapid business expansions in China – reports that sometimes stretch the truth but go unchallenged because U.S. financial analysts fail to conduct adequate research.
Company reports can be difficult to verify because only major western financial institutions have offices in China, said Eric Jackson, founder of a U.S. hedge fund called IronFire Capital. Other firms operate in Hong Kong and gather information through the Chinese media and occasional trips to the mainland.
Recently helping to fill this information vacuum are independent research firms, including some that benefited by short selling stocks in Chinese companies listed on U.S. markets before spreading doubts about success stories.
Studies of Chinese companies by short seller Muddy Waters Research and Citron Research, for example, allegedly uncovered fraudulent financial reporting by Chinese firms such as Dalian Rino International and China MediaExpress Holdings.
These independent reports have triggered sell-offs of so-called “China concept” stocks, and short sellers profited.
A case in point is Universal Travel Group (UTA), which used CUSC services for a successful reverse merger and listing on the New York exchange. UTA bought an OTCBB shell in 2006, merged with four Chinese travel companies in 2007, and transferred to NYSE in 2009.
Trading in UTA shares was halted in April. A week later, the company fired its accountant. And at last count, the Wall Street Journal reported, more than eight U.S. law firms have filed class-action lawsuits on behalf of investors against UTA.
UTA is one of about 20 listed Chinese companies that now face class-action lawsuits in the United States, said Guo Bingna, a lawyer at the firm O’Melveny & Myers LLP.
“This is an intensive period for Chinese companies to deal with lawsuits,” Guo said.
PCAOB found that 74 percent of the Chinese companies that used the reverse merger listing process had American accounting firms, and 24 percent used Chinese firms.
These U.S. accounting firms often outsource the work to Chinese accounting or consulting companies. Indeed, this was the route taken by every company whose case was studied by PCAOB.
Chinese companies that list through the standard IPO process are more likely to hire U.S. accounting firms that handle financial reporting from start to finish.
“China doesn’t allow agencies such as PCAOB to audit Chinese accounting firms, and Chinese securities regulators and the Ministry of Finance fail to regulate this area,” said Paul Gills, a visiting scholar in the Department of Accounting at Peking University.
“Coordination between regulators in the two countries is very important when companies list overseas,” Gills said. “A loophole makes fraud easy.”