Monday, April 11, 2011

PUDA was a Reverse Merger IPO in 2005-07-15. This has been going on for a while.

Puda Coal (PUDA) was halted this morning. The chairman is being investigated.
Puda was a reverse merger IPO in 2005. You would think that since it's been almost six years that the company would have been vetted and potential problem resolved.

A reverse merger is when a private company purchases control of  a public shell company. The two companies merge into one publicly traded company. Often, this is in the U.S. market and this process bypasses the checks and balances  imposed by vigilant investors. These companies undergo a traditional IPO after their mergers.

When the business is an international company, potential problems arise because of lack of transparency and the different auditing standards imposed by the local governments. Chinese executives have engineered reverse merger or reverse takeovers to bring their companies to the American Markets and get new investors and an infusions of cash.
This is not the only Chinese stock that has had trouble this year.
CCME, LLEN, CHNG, RINO have all had improper accounting problems.

But not all Chinese reverse mergers are bad. (YOKU) is doing great since its IPO in December of 2010.  Another good company that IPO'ed around the same time was China Dangdang (DANG).
Both companies are audited by Ernst & Young. As a good rule, I would make sure that the auditors are from a prestigious big 4 firms.

I have found a good website that gives you the details of  many Chinese stocks that are listed on the U.S. markets. On this site you will find who the stocks auditors are, if they are in fact reverse takeovers, and much more.

Considering PUDA et al, sticking to American company penny stocks would give you much better transparency. I would stick to companies that can be researched and studied.

Related Articles & Opinions:
Company Announcement
Investigation Begins
Advantages/Disadvantages of RTO

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