Where's the Pea? By William Cate

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The Shell Game is alive and well in the U.S. Stock Markets. It operates on a reporting loophole in GAAP (Generally Accepted Accounting Principles). The potential victims are investment funds, angel investors and the public. While the U.S. Securities and Exchange Commission (SEC) has been aware of the sting for over a year, they have done nothing to stop it. It's been successfully run from the New York Stock Exchange (NYSE) to the Over-the-Counter Market. Its use is growing because the regulators ignore it.

The Audit Loophole

The loophole is the rule for reporting a consolidated audit in a public company's annual filing with the SEC. The rule holds that any private company in which the public company holds at least 51% of the equity must be included in the public company's audit. The problem with the rule is that the private company's revenues and profits are easily confused with the public company's lack of revenues and profits. And, the non-U.S. financial service firms structuring these public company filings ensure that the investors in the public company have no access to the private company asset when the swindlers elect to repossess the private company. It's a win situation for the overseas financial service firms. They get the profitable, private company and whatever profit they can make from the sale of insider shares. The American investment community gets the shaft. The concept of giving the investing public the shaft was the basis for the 1989 Forbes claim that Vancouver was the "Scam Capital of the World." The 21st Century winning of this award should be Hong Kong.

How This Swindle Works

There is a public company without revenues or profits. If it were audited, the shares would be worth nothing because the public company is without cash producing assets or income. The only "asset" the public company claims is at least a 51% ownership in a private tax haven corporation. The preferred tax haven is the British Virgin Islands (BVI). The private tax haven Corporation also lacks revenues or profits. If it were audited, it would be without cash producing assets or income. The only "asset" the BVI corporation owns is at least a 51% equity interest in a private operating company, usually in the People's Republic of China (PRC). The American public company's audit is limited to the private PRC's company assets, income and profits. There is no mention of the BVI private tax haven Corporation or US Public company in the audit. The consolidated audit only covers the private PRC Company.

There is no possibility that the Private PRC Company will pay dividends to the Private BVI tax haven Corporation as long as the American Public Company appears to own the BVI Corporation. So, there is no possibility that the American public company will ever see a dime.

Follow the Money

The swindle targets investment funds and angel investors willing to buy the Public Company's shares. The Private Placement investors receive shares in the worthless public company. Their money goes to the BVI tax haven Corporation. The private BVI Corporation invests the American Private Placement funds into the private PRC Company. The Private Investments continue as long as there are foolish American investors willing to convert their dollars into worthless stock.

Usually ineptly, the worthless public company's shares are promoted to American investors. The insiders, as with almost all stocks, dump into the public buying. After paying the public company filing costs and the costs for the stock promotions, the insiders take their profit.

The End Game

Once it's clear that more American Private Placement financings are unlikely, the private PRC Company cuts the link to the American Public Company. In a recent NYSE example, the private PRC Company refused to be audited. The game was over.

The BVI link is the key that gives the swindlers ownership of the American public company assets. From the PRC's viewpoint, the foreign investor is the BVI Company and not the American Public Company. Tax havens are tax havens because it's nearly impossible to get any information about a company incorporated in that jurisdiction. So, the swindlers can easily transfer the public company's assets in BVI without anyone being the wiser.

Avoiding This Sting

I call this Shell Game a Roach Motel because your money goes in, but it never comes out. It's easy to spot Roach Motels in the annual filings of any public company. Find the item that discusses the company's corporate history. If that history is a corporate structure with the public company owning a tax haven corporation that in turn owns a private operating company, it's a Roach Motel. There are scores, if not hundreds of these Roach Motels trading today. If you can't find an example, email me at Beowulfinvestments@Earthlink.net and I'll send you a few examples to use at the SEC's EDGAR website.

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