Agency wants to see financial figures of Chinese reverse merger companies

WASHINGTON - US regulators may sue at least one China-based auditor for obstructing a probe of so-called "reverse mergers". The move comes after Chinese regulators blocked the firm from providing requested data, a person with direct knowledge of the matter said.

The Securities and Exchange Commission (SEC) launched the investigation last year amid concerns that some Chinese companies that gained listing on US exchanges were doctoring their financial statements. US exchanges have frozen or delisted shares of more than a dozen China-based companies since March.

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"While the vast majority of these Chinese companies may be legitimate businesses, a growing number of them are proving to have sufficient accounting deficiencies or being vessels of outright fraud," SEC Commissioner Luis Aguilar said last month.

The SEC is limited in its ability to enforce securities laws over such firms and to recover losses, he said.

Regulators have mainly focused on Chinese companies that obtained US listings through reverse mergers - transactions in which a closely held firm acquires one that is publicly traded and becomes able to sell shares without the scrutiny of an initial public offering.

More than 150 Chinese companies with a combined market value of $12.8 billion have entered US markets through reverse mergers since 2007, according to the Public Company Accounting Oversight Board, which oversees auditors of public companies. During that period, only about 50 Chinese companies filed IPOs.

Most of the customers of the firms that are under investigation are in China, not regulated by the SEC. Without the ability to subpoena information from the firms' customers, it's been difficult for the SEC to corroborate sales records, said another person who wasn't authorized to speak publicly about the matter.

The SEC, which has already sanctioned one auditor for failing to carry out adequate checks, is preparing more cases that may be filed in coming months, the person said.

Nasdaq OMX Group Inc, the second-biggest operator of US stock exchanges, said in an April 18 filing that it plans to tighten conditions for companies that list through reverse mergers.

Bloomberg News