04/04/2011 01:19 pm ET | Updated Jun 04, 2011

SEC: Many Foreign Companies In U.S. Are 'Vessels Of Fraud'

WASHINGTON (Sarah N. Lynch) - Federal securities regulators are probing Chinese and other foreign companies with questionable accounting practices that have used backdoor methods to access the U.S. capital markets, a top regulator said on Monday.

"In recent years we have seen a spike of private companies merging with public shell companies," said Luis Aguilar, a commissioner at the U.S. Securities and Exchange Commission.

"While it is Chinese companies that have grabbed recent headlines, the problems coming to the forefront were not necessarily limited to companies based in China," he said.

Aguilar added that while the majority of these may be legitimate businesses, "a growing number" of them are proving to have "significant" accounting issues or are "outright vessels of fraud."

Aguilar spoke before the Council of Institutional Investors on Monday about a growing trend that has caused alarm at the SEC and led to trading suspensions and other enforcement actions.

At issue are moves by private foreign companies to merge with U.S. shell public companies to raise capital. Many of these companies have been Chinese. In some cases they have used a procedure known as a reverse merger to bypass the due diligence of an initial public offering.

But many of these businesses often have problems with the quality of their accounting and the SEC has been on the prowl for deficiencies and for ensuring the accounting is in line with U.S. standards after some companies hired unknown auditing firms.

Last week, the SEC suspended the trading of China Changjiang Mining & New Energy Co Ltd -- a Nevada company with headquarters in China -- amid questions about the accuracy of its public filings and the resignation of its auditor.

In another case, the SEC launched a formal investigation against Chinese printing equipment maker Duoyuan Printing Inc on concerns it filed false documents, failed to maintain adequate financial records and deceived its external auditor, Deloitte Touche Tohmatsu.

Since January 2007, Aguilar said there have been 600 backdoor registrations of this nature by foreign companies, 150 of which are based in China.

He said there is concern that U.S. accounting firms are signing off on the companies' statements without performing their own independent work and are relying instead on auditing firms in China.

He noted the SEC has launched an internal task force to probe fraud by overseas companies listed on U.S. exchanges.

"Our staff is committed to doing everything we can," he said. "The SEC has already brought cases and will continue to do so."

(Reporting by Sarah N. Lynch; Additional reporting by Dena Aubin in New York; Editing by Maureen Bavdek)

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