EXCLUSIVE: Dan David of GeoInvesting on Determining Legitimacy of Chinese Reverse Merger Firms

In an exclusive interview with Benzinga, Dan David of GeoInvesting explained what he looks for in the reverse merger space to determine legitimacy.

Change in Environment

Dan David began by explaining how this process has adapted over the past several years. Now, a majority of Chinese firms that underwent the reverse merger process are trading at fraud multiples. “In the past it was more basic things. You could look at the margins and say ‘Okay, this is way out of line of the industry standard, even in China’. Or, a particular region of the country that is known for fraud.

Sphere of Influence

David went on to explain how companies’ relationships are used to determine fraudulency.
“Now I find that one of the best indicators is what I like to call the sphere of influence. When you look at a company, you look at who their deal maker is, who their law firm is, who their auditor is. That sphere of influence can give you a good indication of whether you are spending your time usefully or not.”

Law Firms

“A lot of these companies use the same three or four law firms that handle most of the frauds. These law firms don’t just defend them in a lawsuit or are their public face now. they brought them public, they introduced them to investors and they really positioned them to commit this fraud.”

Law firms often find the dormant shell companies, then navigate the companies through the reverse merger process. A reputable law firm is similar to a well known auditor, it provides a sense of security for investors.

Auditors

“I think we all know Deloitte, KPMG, and others have been caught up in this. But, there are a few auditors that are just over and over involved. And you really can’t say anything good about any of the clients they’ve had.”

While some companies without a well known auditor can be trusted, investors should note the elevated level of risk they are undertaking. Similarly, several companies with brand name law firms have been proven to be fraudulent.

Deal Makers
“I think we all know three or four deal makers that have made pretty big headlines at having ridiculously bad luck when you look in relation to the valuation of the companies that are public today.”

That is, ridiculously bad luck in terms of current valuation. These deal makers have made an incredible amount of money dumping their shares (20-30 percent of the company) at the height of market. These deal makers knew they were frauds.