Bloomberg BusinessWeek Calls Attention To Chinese Reverse Merger Frauds

When it's too good to be true, it usually is. Such was the case of China Sky One Medical Inc. CSKI reporting that it was selling out of its inventory every seven days. According to a recent investigative report by Bloomberg BusinessWeek, this isn't an unusual phenomenon. Bu that's because, in reality, these seemingly successful companies are northing more than frauds. BusinessWeek states that CSKI is only "one of more than 350 small Chinese companies to have listed in the U.S. since 2004 through a process called a reverse merger, in which an operating Chinese company takes over an all-but-defunct publicly traded U.S. shell company." And the impact appears to be quite large, the report continues, as "shares of such reverse mergers are held by many funds available to retail investors, including Oppenheimer Main Street Small Cap Fund (OPMSX) and the PowerShares Golden Dragon Halter USX China Portfolio, and are scooped up by small-cap index funds." The report cites investment bank Roth Capital Partners in measuring the reverse merger market size: 94 companies trading an average of 50,000 shares per day with a total market value of $20 billion. These companies trade on U.S. stock exchanges, but because their principle assets remain in China they are regulated by Chinese laws outside the domain of the SEC. To read more about Chinese reverse mergers and the army of short sellers that has sprung up to fight them, head over to Bloomberg BusinessWeek.