What’s An Investment in a Chinese Fraud Worth?

3 Jun

From some cursory reading (dare I say research?), the simple answer seems to be “little, if anything,” but I don’t think a Chinese legal novice such as myself, well-read or not, is really qualified to say anything close to authoritative on the subject.  That’s why I reached out to lawyer Dan Harris, one of the authors of the excellent China Law Blog to see what he thought about alleged (if not virtually certain, at this point) Chinese Frauds like China MediaExpress Holdings and U.S. investors ability to recover money from them.  His response, while neither a legal opinion nor definitive, should scare some investors who think they’ll recover money from a Chinese fraud just like they would from a U.S-based one.

Many others have speculated that investors in such firms are screwed, although I’ve yet to read anyone even remotely expert talk about to what degree .  I think many U.S. investors assume that since even Madoff “victims” will see some money returned to them from the largest financial fraud in U.S. history, they’re sure to get some cash back if their precious Chinese high-flying tech stock turns out to have been inflating revenues for a few quarters (years, whatever).  While such an assumption is prima facie ignorant, I think those harboring it (and similar ones) would benefit from Dan’s experience.  On CCME, and U.S. investors’ prospects:

I have never heard of any American shareholder getting money back from China in these sort of circumstances.*

I’m not going to share the rest of our conversation for privacy reasons, but if that statement doesn’t send a shiver down the spine of anyone still harboring delusions about recourse to assets of Chinese frauds, I don’t think I can be of any more service.

For sure, recovery is not necessarily impossible; its just about as likely as the CEO of the company calling you up one day and asking you to join the Board of Directors.  If you’re waiting by the phone, go nuts and buy up all the hot Chinese stocks you can get your grubby little PA on.  If you fancy yourself an inhabitant of the realm of reality, methinks you should strongly reconsider how risky investing in Chinese stocks really is.

*This is not legal advice and should not be construed as such, rather it is provided for informational purposes ONLY.

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