|F.B.I. Looks Into Adviser on Chinese Reverse Mergers |
By DAVID BARBOZA
New York Times
January 27, 2012, 3:56 pm
8:41 p.m. | Updated
The Federal Bureau of Investigation on Wednesday searched the offices of a New York-based corporate advisory firm that specializes in helping Chinese companies sell shares in the United States.
The firm, the New York Global Group, is known for helping take midsize Chinese companies public in the United States through reverse mergers, or by buying the shell of defunct American companies that had been publicly listed — a controversial practice that has come under regulatory scrutiny in recent months. The F.B.I. search is the strongest indication yet that federal investigators may be going after the advisers and promoters who helped create a thriving business in so-called backdoor listings of Chinese companies.
Executives at the New York Global Group did not return a phone call requesting comment. J. Peter Donald, a spokesman for the F.B.I. in New York, confirmed on Friday that agents searched the New York offices of the firm, but declined to offer more details.
“We conducted a search in conjunction with an ongoing F.B.I. investigation,” he said. The F.B.I. agents also searched the home of Benjamin Wey, the company’s president.
Investors have lost billions of dollars over the last year on Chinese reverse mergers, after some of the companies were accused of accounting fraud and exaggerating the quality and size of their assets. Shares of other Chinese companies that went public in the United States through the conventional initial public stock offering process have also been punished out of fear that the problem could be more widespread.
American officials are now pressing China to step up its enforcement of securities laws and to improve accounting standards. Analysts say Chinese regulators are also investigating whether consultants in China were helping companies exaggerate or fabricate their assets and accounts to win over global investors. In recent months, a wave of class-action lawsuits have targeted not just the Chinese companies that went public through backdoor listings in the United States, but also some of the lawyers, accountants and corporate advisers who counseled them or helped structure the deals.
Using a reverse merger has been a popular way to list in the United States over the last five years; some major law firms and midsize investment banks have taken part in the process. Because the shell of a defunct company is used, the listing is less expensive and less rigorous than a conventional I.P.O. Many Chinese companies simply acquired a shell company, inserted their China operations into it, and then reported strong earnings growth, which often drove up the value of their shares. With questions about whether those profits were as rosy as reported, shares of Chinese companies listed in the United States have dropped.
The New York Global Group is partly controlled by Mr. Wey, who also spells his last name Wei. He helped some large Chinese companies list in the United States and promoted himself as an expert in American-Chinese relations and “on how to best invest in China-based American-listed companies.”
Mr. Wey could not be reached for comment.
One of the companies he advised, Bodisen Biotech, was delisted by the American Stock Exchange in 2007 after the company admitted “filing incomplete, misleading and/or inaccurate information in its public filings.” Also, in 2005, without admitting or denying fraud, Mr. Wey agreed to be censured for misleading investors in the state of Oklahoma and failing to disclose important information.