US regulators scramble to warn on Chinese stocks

By David Gaffen

NEW YORK (Reuters) – Regulators scrambled to warn of the risks surrounding Chinese companies that have listed in the U.S. through reverse mergers, though critics said the intervention was too little, too late following a series of accounting scandals.

Brokerages also continued to crack down by preventing investors from borrowing on margin to buy many Chinese stocks amid concerns about whether they were overvalued.

The U.S. Securities and Exchange Commission said Thursday that it was urging investors to review company filings and in particular watch for those who are not required to file financial reports with the regulator, but plenty of investors have already been burned.

The Nasdaq Stock Market also moved to amend earlier proposed new listing requirements for companies that had gone public by combining with listed shell entities.

The SEC, which has also launched a broad investigation into accounting irregularities and audits of Chinese and other foreign companies listed in the U.S., is being slammed by some for jumping in far too late.

“This is akin to trying to put the horse back in the barn,” said Lynn Turner, former chief accountant for the SEC.

“The SEC has been aware of this problem for years. While it is better late than never, it would be great to see at least one proactive regulator in DC who keeps the horse in the barn.”

The scandals have caused U.S. investors to grow weary of the China growth story and increasingly wary of Chinese listings, even quite substantial companies on the New York Stock Exchange and Nasdaq markets.

The SEC and others “are still playing catch up from a regulatory perspective,” said A.J. Mediratta, senior managing director at emerging markets specialist Greylock Capital Management in New York.

The often-sketchy financials of some Chinese companies have prompted brokerage firms to protect themselves and investors by limiting their clients’ ability to borrow on margin to buy shares. Charles Schwab said Thursday it was adjusting margin requirements for “many” Chinese stocks, following moves by other brokerages to limit margin trading.

“If you have advisors that are recommending Chinese stocks, I think you’d better be careful,” TD Ameritrade CEO Fred Tomczyk told Reuters on the sidelines of a Sandler O’Neill investment conference. TD Ameritrade said it did not allow clients to borrow on margin to buy many Chinese companies.

Since March, more than two dozen China-based companies have disclosed auditor resignations or accounting problems. Investors are starting to shun the sector wholesale, with well-known names such as Baidu.com and Renren Inc getting hit by the fallout. The Bank of New York Mellon China ADR Index is down more than 8 percent since its 52-week closing high reached on April 8.

Tuesday, Interactive Brokers banned clients from borrowing on margin to buy about 160 different Chinese companies. Founder and chief executive Thomas Peterffy said Thursday that the group “has had an increase in volatility,” and that “the Chinese would have to bring their accounting standards up to date.”  Exclusive: China concerns drove margin ban Schwab alters rules on some China stocks Taomee drops in NYSE debut”

The added scrutiny has also affected new Chinese issues, which are no longer blowing investors out of the water, but limping into the market, often hobbled by concerns about internal financial controls.

China-based Taomee Holdings Ltd , which operates a website for children, lost 8.6 percent in its stock market debut on Thursday after pricing at the bottom of its anticipated range.

Reverse mergers allow companies to trade on U.S. exchanges even though their operations may be overseas. The listing process is quicker than a traditional initial public offering but involves less scrutiny of a company’s books.

“Many companies either fail or struggle to remain viable following a reverse merger,” the SEC said in its investor bulletin.

There are approximately 600 issues on U.S. exchanges as a result of such transactions, of which about 150 come from the China region.

“There’s so much money going into China as a momentum play we are seeing both real valuation and governance issues that are concerning. This is an environment where bad deals get done,” Mediratta said.