A new documentary, “The China Hustle”, just released by Magnolia Pictures, reveals an ongoing and significant financial scandal relating to Chinese companies who, combined with U.S. banks engage in a scheme to defraud U.S. investors. The scam is significant and highly relevant given the ongoing concerns of trade and economic balance between the nations. It involves something called “reverse mergers” in which an active Chinese company merges with a formant shell company which is already listed on NASDAQ or another exchange here. The shell company is no longer operating and when the merger occurs, the Chinese company is suddenly trading on the exchange. The film is available On Demand or through Amazon video and Netflix.

Surprisingly, until recently, no one, including the Securities and Exchange Commission has looked closely at the Chinese companies to see if they are operational in accordance with their required SEC filings.

The Chinese companies are guided to the stock exchange by small investment banks, including Roth Capital Partners in California and Rodman & Renshaw in New York. This was done without the kind of audits or oversight usually attendant with U.S. companies entering an exchange.

The companies are then hyped by the banks, which made fees for bringing the Chinese companies here. Then the banks sell shares in the companies, which are cashed out when the stock rose high enough. What is ultimately revealed in the film, is that many of these companies were not doing the business they said they were doing in the SEC filings and when people looked deeper, some were doing very little business at all. Once this was revealed publicly, the stock falls to fractions of the value and many investors lost significant sums they invested.

Who revealed the scam? In the film, Pennsylvania hedge funds manager Dan David Founder of Geo Investing in Pennsylvania started out by investing in these Chinese companies but soon learned from Carson Block, a U.S. Short seller that one of the companies, Orient Paper was not operating like it promises in the SEC filings. David began exposing Chinese frauds and also profited through short-selling. The film points out that China does not seek to punish its citizens for cheating persons outside of China.

With the recent tariff imposed on China by the U.S. and then by China on us and particularly with the enormous theft of U.S. intellectual property by China companies, the schemes exposed by THE CHINA HUSTLE are even more relevant. The lack of investigation and action by the Securities & Exchange Commission warrants examination by Congress. It is the individual U.S. investors who get hurt by these companies those people for whom the SEC was created and it supposed to protect.

Jeffrey Newman represents whistleblowers.