Streetwise for Friday, April 12, 2019

Dan David ran a small Philadelphia-area investment firm that was hit hard by the 2008 economic downturn. Determined to get their clients’ money back, he began to buy into Chinese companies that were listed on the American exchange and were in turn creating exceptional returns. By 2010, David’s company earned back the money it had lost.

However, it became apparent to David that many of the companies he was investing in were basically shell corporations with no assets. Concerned about the validity of the so-called research reports, David hired a team to go to China and investigate 30 corporations. What he found was a problem much worse than even he imagined.

The scam is relatively simple. In what is known as a “reverse merger,” a Chinese company merges with an American shell company (a company which has largely ceased operation but is still listed on stock exchanges), and goes public without jumping through the regulatory hoops the SEC requires, because the American company has already gone down that road. Reverse mergers have been employed, primarily by new start-ups for years.  

By creating inflated financial statements, the new corporation looks attractive to firms on Wall Street, which hype the company and earn fees by selling its stock. According to the documentary, “The China Hustle”, by Jed Rothstein, between 2006 and 2012, 400 Chinese companies were listed on U.S. exchanges, and 80 percent were the result of reverse mergers.

David in trying to sound the alarm, he was up against a brick wall, even with the Securities and Exchange Commission who said they had no mandate, or jurisdiction in China.

The attitude even today is that fraud is merely a monetary fine that corporations pay. The fees major banks make in one quarter is likely to be more than the SEC’s entire budget.

David’s solution was to expose the transgressions in reports he published thereby empowering investors with the opportunity to short the stock, thereby often forcing the company to collapse.

Those desiring to perpetrate fraud are endlessly creative. Bogus Jamaican lotteries, false marriages for immigration purposes, mediocre seafood marketed as better seafood, insurance rip-offs from fake accidents and fires, even foreign substandard cheese passed off as being domestic top-shelf, are only the appetizer. 

The Federal Trade Commission has ranked Florida the first in identity theft. The number of false federal income tax returns in South Florida is 46 times the national average. 

However, Florida does not have a monopoly on scam artists. Bernie Madoff relied heavily on his religion to gain entry to wealthy Jewish investors and institutions.

Shawn Merriman, aka the “Mormon Madoff,” was a well-respected investment broker and a lay bishop in the Church of Latter-Day Saints, known more commonly as the Mormons. For 14 years, he ran a Ponzi scheme that bilked investors, including his own mother, out of more than $20 million. 

Being able to discuss Scripture is neither a prerequisite for, nor an affirmation of financial acuity. Donald Nadel and Joseph Malone, operating as the Renaissance Asset Fund, raised more than $16 million, largely from members of the Jehovah’s Witnesses. The pair promised risk-free returns of 10 percent to 25 percent in as little as four months. Renaissance was nothing more than a Ponzi scheme. 

Even the U.S. mail is not immune. The Postal Inspection Service is offering a $50,000 reward for information leading to the arrest and conviction of anyone involved in robberies of letter carriers in South Florida.

Yes, I understand that greed can have a perverse effect on both the wealthy and the not so wealthy. What human trait do you think built Las Vegas? Why does virtually every State have a lottery? Everyone wants the riches of life without working for them. However, if you believe that investing on Wall Street is part of the same church, just a different pew, you are wrong.

A degree of investment success of Wall Street is achieved by simply investing in tried and true-blue chip companies with years of increased earnings and dividends.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to