A slew of highly speculative China-based penny stock companies whose shares trade in the United States--and the brokers, promoters, and financial public relations people behind the companies--are reportedly coming under increased scrutiny from US regulatory agencies, specifically, the Securities Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
The SEC is responsible for protecting investors; the NASD, for regulating brokers.
Nearly all the companies went public through a seemingly magical, minnow-swallowing-a-whale process known as reverse merger, whereby a publicly traded US shell company uses its stock to acquire a larger company, which becomes the surviving publicly traded entity. The SEC recently tightened the rules for reverse mergers because of the history of abuse associated with the process.
To push their stocks, penny stock companies typically rely on Internet-savvy promoters and PR specialists, compensating them with combinations of cash, stock, and stock options (or warrants). In a practice known as pump and dump, penny stock promoters use a range of techniques to drive up a company's stock before unloading their positions.
A number of promoters pumping so-called China play penny stocks have shady pasts, including criminal records.
A Chinese penny stock scandal--while small potatoes compared to other issues--would embarrass Beijing. Government officials are increasingly sensitive to stories and allegations of financial fraud and corruption.
A small US brokerage firm associated with Chinese penny stock companies, New York Global Group, has indirectly focused attention on the speculative sector by aggressively advertising itself on a US cable television network. The firm's founder, who was born in China, has a history of US regulatory problems.
technorati tags: China