SEC targets US firms facilitating China-linked stock schemes

Regulators in the United States have targeted professional services firms allegedly linked to companies suspected of China-related “pump and dump” schemes as part of a new crackdown on cross-border fraud.

The Securities and Exchange Commission (SEC) announced that a task force launched last week will target US-based “auditors and underwriters” who facilitate “potential securities law violations involving companies from foreign jurisdictions such as China.”

The regulatory agency made this announcement the day after Nasdaq, the world’s second-largest stock exchange, revealed plans to tighten its trading standards to combat a rise in suspected “pump and dump” schemes, where interested parties artificially inflate a company’s stock price and then suddenly sell their own shares for a profit.

A person familiar with the SEC’s decision told the Financial Times, “Regulators are going to crucify the bulge bracket,” referring not to the prestigious banks and law firms but to the small white-collar groups that act as a “conduit” for Chinese companies applying for IPOs in the US.

“This is a national security issue, and that is the SEC’s focus,” this person added.

As the Financial Times reported last month, investors have lost billions of dollars in recent months by investing in a handful of small, Nasdaq-listed Chinese stocks that were heavily promoted on social media.

Analysts and academics have long highlighted that foreign companies used as vehicles for pump-and-dump schemes often gain access to US markets through a small group of underwriters, auditors, and law firms.

A 2023 study by researchers Stephen Walker and Ian Gow from the University of Melbourne found that Nasdaq IPOs involving a specific group of underwriters and auditors were associated with “significantly worse returns” for investors.

“If you want to clean up Wall Street, go after the auditors and underwriters who enable [pump and dump] schemes. Billions of dollars have disappeared,” Walker told the Financial Times on Tuesday.

Others argue that the SEC, which has laid off hundreds of employees in recent months, is ill-equipped for the task. Bill Singer, a lawyer and former regulatory attorney at the American Stock Exchange, commented, “If you really want to go after abuses and crimes in the securities industry, perhaps the least effective way to do it is to form a task force. … The best way to do it is to hire an experienced lawyer and an investigator and let them build a case.”

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,” the person said, adding that they no longer have plans for Chinese company IPOs.

This source said that the new Nasdaq rule, which requires Chinese company IPOs to have a minimum value of $25 million, will “weed out the nonsensical companies.”