Randolph: “I just received a hot tip about this Chinese reverse merger company. I think we should invest.”
Mortimer: “But did you ask this hot tipper about his motives? Maybe we should do our own research instead of relying on what somebody has told us.”
Randolph: “Nah, it’ll be fine.”
Three months later…
Randolph: “You idiot! We should have kept in mind that information from online blogs, social networking sites, and even a company’s own website may be inaccurate and sometimes intentionally misleading.”
Or if you’re not a fan of
the genius of 1980s Eddie Murphy the pictorial version, this advice comes at the end of the SEC’s latest investor bulletin, this one looking at the risks of investing in Chinese reverse merger companies:
Be Skeptical: Whenever someone gives you a “hot” tip, always ask what motivated them to do so. Make sure that you do your own research instead of relying on what somebody has told you. Keep in mind that information from online blogs, social networking sites, and even a company’s own website may be inaccurate and sometimes intentionally misleading.
Not the “online blog” you’re now reading, of course.
More seriously, the bulletin takes the reader through the basic structure of a reverse merger, the listing and disclosure requirements these companies have to meet, the special risks of investing in them, and the SEC’s latest investigative efforts — which include suspending trading in a number of these companies for suspicions of exaggerating revenues and other potentially fraudulent claims.
And although we were jesting above, we’re glad the SEC continues to focus on the issue. The agency took its time getting round to it, but in the last few months it’s been scrutinising these reverse merger companies more closely and, crucially, has finally started investigating the auditing processes used by the accounting houses they hire.
Our colleagues at FT Tilt, in a great post last week analysing the peripheral players involved, put it best:
Clearly, the SEC has realised that the Chinese reverse mergers saga isn’t just about allegedly fraudulent mainland companies. Rather, the saga is also about “specialist” auditors, banks and lawyers who targeted small-cap Chinese companies with big American dreams, analysts said.
Click to open the bulletin in pdf format:
SEC (finally) cracks down on the auditors behind Chinese reverse mergers – FT Tilt
SEC probes China auditors – WSJ
Here there be dragons – MacroMan