Former Sen. Specter: Nasdaq discriminates against the Chinese

| Sunday, March 11, 2012

Former U.S. Sen. Arlen Specter, who once described Chinese business practices as international banditry, is accusing Nasdaq of racially discriminating against Chinese companies trying to raise money on that stock market.

Specter, 82, of Philadelphia filed a lawsuit challenging Nasdaq's decision in December to remove Chinese wind-tower maker CleanTech Innovations Inc. from the stock exchange. Nasdaq, in its delisting notice, cited concern about CleanTech's close association with controversial Wall Street deal maker Benjamin Wey, who the stock exchange's senior vice president labeled "notorious" for his past stock promotions.

Wey's firm, New York Global Group Inc., specializes in raising money for Chinese companies through complicated transactions called "reverse mergers" in which Chinese firms take over American shell companies.

Such mergers have cost investors tens of billions of dollars in losses, said Dan David, vice president of GeoInvesting LLC, a firm that follows the Chinese reverse merger equities markets.

Specter began representing CleanTech before he left office on Jan. 3 after serving three decades as one of Pennsylvania's two U.S. senators. In a Dec. 20 lawsuit in federal district court in New York, Specter and CleanTech accused Nasdaq of using a "racially profiling set of procedures" for companies with one thing in common: "Their management is Chinese."

In an amended complaint filed Jan. 5 seeking damages of at least $100 million, Specter and CleanTech allege Nasdaq officials engaged in "state-sanctioned racial discrimination" against Chinese companies.

A week later, Specter said in a letter to the secretary of Commerce and the U.S. trade representative that Nasdaq "has disqualified CleanTech because of its Chinese consultant." The CleanTech litigation uses the word "consultant" throughout, as a substitute for Benjamin Wey's name, the Tribune-Review found.

Nasdaq denies the allegations. Assertions of racism "have no basis in fact or law," said spokesman Joseph Christinat.

A judge dismissed CleanTech's federal lawsuit on Jan. 31 for procedural reasons. The company appealed to the Securities and Exchange Commission.

An about-face?

For Specter, defending Chinese business efforts to gain money from U.S. investors contrasts with comments he made before leaving the Senate. The Republican-turned-Democrat opened a legal practice in Philadelphia after departing Washington.

In a February 2010 Senate hearing, Specter accused China of "international banditry" in propping up Chinese companies at the expense of the United States.

Specter made statements backing CleanTech and Chinese companies in general before the FBI raided Wey's New York offices and home on Jan. 25.

"I have no further comment at this time," Specter responded to an email from the Tribune-Review seeking comment.

Wey, who denied wrongdoing in letters to regulators, would not speak with the Trib.

GeoInvesting's David scoffed at the lawsuit's assertion that reverse merger companies such as CleanTech are actually "American companies."

David, Nasdaq senior vice president Michael Emen and other experts say such Chinese companies are empty American "shells" with almost all assets in China .

"There are no resources in the American shell," David said. "The resources are in China, and American investors cannot get them out of China."

Securities records show that CleanTech formed in a series of transactions culminating in July 2010, when it absorbed Everton Capital Corp. Formed in Nevada in 2006 to look for jade deposits in Canada, Everton had no revenue or operations, according to securities filings.

With the reverse merger, Everton became known as CleanTech Innovations Inc., a wind-energy firm headquartered in China's Liaoning Province.

Reverse merger warning

A recent Trib analysis of about 125 U.S.-traded Chinese firms revealed at least 105 of them had a pattern of class-action fraud suits, delistings and other alleged problems that caused many to plunge in value.

"Investors should be careful when considering investing in the stocks of reverse merger companies," the SEC warned in June.

In a recent letter, the agency told U.S. Sen. Robert Casey, D-Scranton, that American stock exchanges halted trading in more than 40 Chinese companies and the commission "recently approved tougher listing standards for reverse merger companies."

The SEC said it is working with several organizations and authorities to examine reverse mergers, "a significant percentage of which are from the (People's Republic of China)."

Kara Brockmeyer, chief of the SEC's foreign corrupt practices unit, told the Trib that investigators are looking into certain reverse merger companies as well as the "gatekeepers, such as outside auditors and stock promoters" behind them.

It's not clear whether the FBI's raid of Wey's office was part of this wider look at stock promoters.

Transactions probed

Specter's association with Wey was missed by most at the time of the filing of CleanTech's lawsuit. Wey's name never appears in the 30-page suit, which refers to the company's consultant 37 times.

Any confusion, however, is resolved in the lawsuit's exhibits, where Nasdaq explains that it delisted CleanTech because the company failed to provide prior notice about a December financing deal, and "displays an unacceptable disregard for the company's obligations as a listing applicant and for staff's stated concerns regarding the association with Mr. Wey [the 'Consultant']." The exhibits include a nine-page letter to Nasdaq from Wey.

Wey's New York Global has close associations with a similarly named company in Beijing and various companies that furthered Wey's Chinese financing efforts.

The Beijing firm -- which Wey refers to as NYGG (China) and NYGG (Asia) -- drew the most Nasdaq interest. In December 2010, CleanTech needed $20 million to secure contracts, according to SEC filings. Wey told Nasdaq that New York Global's franchise in Beijing loaned CleanTech $10 million at 10 percent interest.

A NYGG China affiliate, Strong Growth Capital, provided $2.5 million in equity financing. Altogether, four investors raised $10 million in stock financing in December. Before the end of the month, they offered to sell it back to the public for $29.2 million.

Nasdaq officials say their interest is not in potential profit or loss. The market is investigating whether all transactions were properly disclosed to potential stockholders -- and the exchange ruled they were not.

Stock dealer's track record a concern

Benjamin Tianbing Wey, a 40-year-old naturalized American and champion of Chinese stocks, was a magnet for controversy before he moved into the 38th floor of the Trump Building on Wall Street around 2003.

In 2004, Oklahoma securities investigators accused Wey of convincing a 68-year-old single woman to invest her $80,000 in life savings in a penny stock company that made herbal remedies, guaranteeing "the doubling of her money and that she would not lose any money."

Three months later, the stock had not doubled, but showed a nice $8,000 gain. The woman ordered its sale. However, without her "authorization or knowledge," Wey -- who then went by the last name of Wei -- reinvested the proceeds in the same penny stock, Oklahoma enforcement officials said.

Shortly thereafter, the woman noticed she still owned the stock and her nest egg had shrunk to $17,710. Wey never disclosed to the woman that "he was receiving compensation from (the company) for consulting services," investigators said.

Without admitting wrongdoing, Wey agreed in 2005 to be censured and banned by Oklahoma from conducting any securities business there.

By then, Wey had started New York Global Group on Wall Street, specializing in raising capital for Chinese firms through a complex practice called "reverse merger."

One of the first was Chinese organic fertilizer maker Bodison Biotech, which the American Stock Exchange eventually delisted because of "incomplete, inaccurate and/or misleading information related to its relationship and payments to a consultancy firm and its affiliates." The consultancy was Wey's, a market regulator testified.

Wey, however, continued to promote Chinese reverse mergers, several of which have done poorly in the market.

Nasdaq senior vice president Michael Emen testified last year that Wey is part of "a cottage industry" in the U.S. promoting reverse mergers. He said there are allegations against some promoters of "undisclosed control and egregious self-dealing at the expense of public investors."

For Nasdaq, he said, the matter is "the key regulatory challenge facing us today."

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