The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Reverse Mergers

  • From Vol. 5 No.31 (Aug. 9, 2012)

    SEC Flexes Enforcement Muscle with Respect to Stock Offering Abuses Involving Reverse Merger Company China Yingxia International and Settles Enforcement Actions with Hedge Fund Manager Peter Siris and Others

    The Securities and Exchange Commission (SEC) has commenced civil enforcement proceedings against various individuals and entities involved in U.S. stock transactions involving China Yingxia International, Inc. (China Yingxia or Company), which went public via a 2006 reverse merger.  In one action, hedge fund manager Peter Siris (along with two affiliates) is accused of insider trading, acting as an unregistered broker and selling unregistered securities.  He is also accused of insider trading in the shares of a number of other small capitalization companies.  The SEC reports that he has settled those charges.  In a separate action, an investment relations firm employed by China Yingxia is accused of acting as an unregistered broker, and the company’s chief financial officer (CFO) is accused of fraud and a number of reporting violations.  The SEC has also entered into consent orders with three other individuals to resolve enforcement proceedings against them relating to their roles in the Company’s stock sales.  This article identifies the various players and their roles in China Yingxia’s capital markets activities; summarizes the charges against Siris, the CFO and the investment relations firm; and summarizes the settlements with the individuals.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies

    The negative publicity surrounding Chinese companies listed in the United States seemingly has reached a fevered pitch.  In April 2011, the Securities and Exchange Commission, or SEC, acknowledged that it had established a task force to address what it deemed to be abuses by Chinese companies accessing the U.S. markets through the use of reverse merger transactions.  SEC Commissioner Luis Aguilar referred to the proliferation of these companies as a “disturbing trend that seems to have challenging implications for capital formation and investor protection.”  In addition to the SEC, the U.S. national stock exchanges have been taking more aggressive actions against Chinese companies.  During 2011, almost two dozen Chinese companies have seen trading in their securities halted or have been delisted in large part due to accounting irregularities.  Against this backdrop, it has become increasingly difficult for investors in this space to separate the undervalued from the fraudulent.  In a guest article, Cavas S. Pavri, a Member in the Business Law Department of Cozen O’Connor, discusses areas that hedge fund managers should focus on in performing their due diligence on investments in Chinese companies.  Specifically, Pavri discusses, among other things: relevant PCAOB guidance; specific factors to consider in evaluating a Chinese company’s accounting firm; specific factors to consider in assessing a Chinese company’s chief financial officer and accounting staff; what to look for when evaluating the corporate governance of a Chinese company; considerations in connection with “variable interest entity” structures; local financial reporting; SAFE registration; the importance of a prior underwritten offering; and insurance considerations.

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