China-linked firms among 255 US shell companies suspended by SEC

US regulator suspends 255 shell companies, including China-related firms, in latest crackdown on 'pump and dump' schemes

PUBLISHED : Friday, 07 February, 2014, 10:53am
UPDATED : Saturday, 08 February, 2014, 1:30am

China-related firms are among the 255 shell companies recently suspended by the US Securities and Exchange Commission (SEC) to prevent a form of fraud made famous in the movie, The Wolf of Wall Street.

At least one of the suspended companies, New China Ventures, is based in China. The firm has a Beijing address, but it was incorporated in the US state of Nevada.

A 2010 corporate presentation said the company was engaged in China's water industry.

New China Ventures has 32 million shares traded over the counter (OTC) in the US. The stock last closed at its 52-week high of 0.0005 US cent.

The SEC's list of suspended shell companies includes several others with China-related names, such as China Oil & Methanol Group, Jinhua Marine Biological (USA) and Tianxin Mining (USA).

On February 3, the US regulator announced that it had suspended 255 over the counter listed shell companies in 26 US states and two unnamed foreign countries. The SEC described these shell companies as "ripe for abuse".

It said it had suspended the companies to prevent "pump and dump schemes". In such a scam, perpetrators tout a thinly traded microcap stock through false and misleading statements about the company to the market, the SEC said.

After buying the shares cheaply and pumping the stock price higher by creating the appearance of market activity, they dump the stock to make huge profits by selling it back into the market.

Such shenanigans featured in the movie The Wolf of Wall Street, based on the true story of Jordan Ross Belfort, a former US stockbroker. Belfort was jailed for 22 months in the US for causing investors to lose US$200 million through a pump and dump scheme.

"The SEC has long tried to root out fraud in the microcap or penny stock market. These small, lightly traded securities can be used in pump and dump schemes to defraud investors," said Terence Healy, a partner at law firm Reed Smith.

The regulator's crackdown is not specifically targeted at China, said Healy, a former SEC official.

In June last year, the SEC suspended 61 shell companies, including one with a China-related name, China Renyuan International.

In 2012, the SEC suspended 379 shell companies, including several that appeared to be Chinese firms, such as Beijing Logistics Corp, China Mall and China Cable and Communications, said Frank Placenti, who heads corporate finance and governance at law firm Squire Sanders.

"Policing this sector can be a challenge," said Margaret Cain, a microcap specialist in the SEC's office of market intelligence.

"The sheer number of these companies stretches law enforcement resources thin and makes this sector particularly dangerous for investors."