The U.S. Securities and Exchange Commission (SEC) has launched a task force to investigate cross-border fraud. Auditors, bankers, and underwriters from private firms help foreign companies, allegedly from China, get listed on US exchanges. This move is aimed at putting an end to micro companies that promote fraudulent schemes, as regulators believe that cracking down on these groups is a matter of national security, according to a Financial Times report.
These foreign companies hype up their prices, and then dump their shares, leaving everyday investors with heavy losses, the report said.
The Securities and Exchange Commission said that a task force launched last week would aim at US-based “gatekeepers, particularly auditors and underwriters” that facilitate “potential securities law violations related to companies from foreign jurisdictions such as China”.
Nasdaq tightens IPO rules
The announcement came a day after Nasdaq announced trade restrictions to combat the pump-and-dump cases, implementing a new rule requiring a minimum public offering size of $25 million for Chinese companies. They also plan to suspend and delist companies that do not comply with the listing standards.
John Zecca, the EVP and Chief Legal, Risk & Regulatory Officer at Nasdaq, shared his views with the media, suggesting that the move would provide a healthier liquidity profile for public investors, even with new companies emerging for investors to explore.
“Investor protection and market integrity are central to Nasdaq’s mission,” he added.
Investors in recent months have reported the loss of billions of dollars, investing in small Nasdaq-listed Chinese stocks, hyped over social media. Experts say these fraudulent companies often rely on a network of small underwriters, auditors, and law firms to access US markets, Financial Times (FT) reported.
According to FT, Bill Singer, a lawyer and former regulatory attorney at the American Stock Exchange, said, “If you really want to go after misconduct and crime in the securities industry, perhaps the least effective way of doing it is by creating a task force. The best way to do it is to hire a veteran attorney and an investigator and let them build a case.”
The increased scrutiny has already made it more difficult for small Chinese companies to list in the US, with at least one small bank stating it will no longer pursue such offerings.
Examining the gatekeepers of U.S. capital market
The task force will focus on investigating transnational market manipulation schemes; foreign issuers with governance structures that pose heightened risks, and gatekeepers facilitating access to US markets.
The managing director of a small, New York-based boutique bank said that “increased regulatory scrutiny” in recent months has made initial public offerings for Chinese stocks more trouble than they are worth.
“It was becoming a headache,” he said, adding that they no longer have plans for Chinese company IPOs.
The launch of this task force is a crucial move by the SEC to proactively protect investors from fraudulent cross-border activities, marking a new chapter in the enforcement of financial justice.
