November 22, 2018 – This informative documentary film lays out huge investment scams reminiscent of the mortgage-based scams of recent years, but this one is based in China. It shows how federal regulators, investment banks and rating agencies all failed to protect American investors who put their money into Chinese companies.
Jed Rothstein's documentary takes us inside China where we see the truth about companies which appear to be worth billions on paper are actually worth only a small fraction of the value claimed. This documentary also takes us inside the mechanics of how these companies skirt federal laws to appear as if they are legitimate companies to invest in.
These schemes include something called “reverse mergers” whereby defunct companies are taken over by other companies selling stocks in Chinese companies. Loopholes in finance regulations, and lax financial regulations in China, combine to allow the value of these companies to be greatly exaggerated to investors. The stock value of these companies is hyped and pumped up in the United States, then sold before the truth is discovered about the real value of the companies. Brokers make a lot of money in these sales, as do investment firms who know when to dump the stock.
Small investors, unaware of the nature of these schemes, get burned by them. Several small investors in the film reveal how their savings were lost in these investment scams. The total amount of money that disappears into China, or into the pockets of crooked brokers is unknown, but the documentary argues it could amount to over one trillion dollars, and it is still going on.
The documentary focuses on mostly small Chinese companies sold through smaller investment firms, including Roth Capital Partners and Rodman & Renshaw, but there are hints that similar problems may exist in much larger companies, including Chinese online retail giant Alibaba.
The rush to Chinese stocks began with the 2008 financial crisis. The stock market crash caused investors to look elsewhere, and the Chinese economy seemed to be booming. Everything seemed good at first, American investors were making a lot of money. One of the first to spot the fraud behind this gold rush was Carson Block, who was doing business in China. While he was there, he agreed to look into Orient Paper because his father was interested in investing in the company. Block was shocked to find out the company's stock was enormously overvalued.
Dan David, co-founder of GEO Investing was one of those looking for a place to invest in order to make up for the stock market losses to his investors in 2008. He found it in Roth Capital Partners. The Chinese stocks went up and GEO Investing was back in business. But then, he read a report by a company called Muddy Waters that revealed the Orient Paper stock scam that had been investigated by Carson Block.
GEO Investing decided it was time to investigate some suspect Chinese firms it was investing in. This turned out not to be easy. The Chinese government and the companies themselves do not want foreign nationals investigating them, so the investigators had to be careful. According to the documentary, some people who tried to investigate the legitimacy of Chinese companies ended up in jail.
What the investigators found out was that investment fraud was rampant in China. It was like the wild west. No regulators were checking on the inflated claims being made for the companies that Americans were investing in. If the scam was revealed, nobody really paid a price for the lives ruined. There were no consequences for most of these stock scams in China. Punishment for firms in the United States amounted to insignificant fines.
On one side of the Chinese stock scandal were scammers who pumped up the stock prices, then dumped them, leaving investors in the lurch. On the other side were investors who exposed the scams and also made money by shorting the stocks (by making investments that gain value when the stocks that are bet against decline in value).
Among those featured in this documentary are former U.S. Army General Wesley Clark, who was chairman of Rodman & Renshaw, and Senator Elizabeth Warren, seen in a Senate investment hearing. This documentary unveils some shocking facts about investments, and how few protections there are for investors facing this kind of scam. It also warns that President Donald Trump, and Republicans in Congress are trying to further reduce regulatory protections for investors. This is a wake-up call for investors. This film rates an A.
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