SEC issues warning about reverse mergers

The Securities and Exchange Commission says investors should be “especially careful” given the potential risks of investing in companies that have gone public through reverse mergers, either because they may be undercapitalized or haven’t faced enough scrutiny from regulators. The agency issued an investor bulletin that described problems with some of those companies, including a number of Chinese businesses that used reverse mergers to get listings on U.S. exchanges.  ”The S.E.C. has suspended the trading in the shares of at least a dozen such companies,” says Dealbook. ” Some companies, the agency says, file questionable documents, while others file nothing at all for periods of time. Sometimes the risk comes from companies that have been using small accounting firms that cannot handle the workload of auditing a large businesses…”

Can defense attorneys be too zealous?

Robert Khuzami, director of the enforcement division at the Securities and Exchange Commission, talked in a recent speech about some of the ways he thinks defense attorneys cross the line into obstruction. “Mr. Khuzami’s comments sound like a directive for attorneys to exercise greater care in how they interact with the S.E.C.,” says Dealbook. But, contrast that with the government’s attempt to prosecute a GlaxoSmithKline lawyer for obstruction over the way she represented the company. The judge wouldn’t even let the case go to the jury, and acquitted her on the spot.

Research report alleges that Sino-Forest Corp. overstated assets, revenues

Muddy Waters LLC said in a research report that Sino-Forest Corp., a Canadian company with extensive timber holdings in China, has substantially overstated the amount of forest land it controls, as well as the amount of wood it has been harvesting.

Trading in the Mississauga, Ontario-based companys stock (TSX: TRE.TO) was halted by the Toronto Stock Exchange after the shares plunged 20 percent in less than 30 minutes. 

Muddy Waters said in its 33-page report that the land purchases that Sino-Forest has reported in China did not square with government records, and appear to be overstated by as much as $900 million. The report also included photographs of apartment buildings and other nondescript structures at the addresses listed for some of Sino-Forest’s major customers and financial partners.

Unlike other Chinese businesses that trade on North American exchanges, Sino-Forest has attracted some large, savvy investors, includging Paulson & Co., which has more than $30 billion in assets under management.