Report: SEC probing Clark firm’s sour deals

Bankrupt company pitched China stock

— Investors lost tens of millions of dollars when they bought shares of Chinese companies promoted by a firm headed by retired U.S. Army Gen. Wesley Clark, a prominent Arkansas businessman and politician.

ABC News reported Thursday that the Securities and Exchange Commission is investigating how U.S. investment firms promoted Chinese stocks that subsequently plunged in value. One of the firms that was square in the middle of the rush to Chinese investments four years ago was Rodman & Renshaw Capital Group, a New York investment firm. Clark served as chairman of the firm from 2007 until 2012.

In 2010 and 2011, Clark sponsored star-studded parties featuring former President Bill Clinton, soul diva Mary J. Blige and former Secretary of State Henry Kissinger to pitch the company’s Chinese investment portfolio.

“The China deals Clark helped promote at lavish parties are among those facing scrutiny,” ABC reported, adding that the billions of dollars U.S. investors lost on Chinese companies “represent collectively one of the biggest financial scams since Bernie Madoff.”

The ABC News report quotes Mary Schapiro, who resigned as SEC chairman in December, as saying that firms like Rodman & Renshaw that served as brokers, lawyers or promoters of Chinese investments that turned sour are “under investigation.”

An SEC spokesman on Thursday declined to comment, saying the agency never discloses companies that are being investigated.

“I am not aware of any investigation into the firm and always insisted my colleagues uphold the highest ethical standards,” Clark said in a statement Thursday. “Our firm was a leader in bringing small and medium-size Chinese companies to the U.S. capital markets. No one is more disappointed than the bankers at the firm that some of these companies - despite receiving consistently clean bills of health from well-respected lawyers and auditors - turned out to have concealed improper business practices.”

Since his tenure as NATO’s supreme allied commander and his bid for the Democratic presidential nomination in 2004, Clark has turned his focus to business. He served as a managing director at Little Rock investment house Stephens Group Inc., formed his own international consulting company, Wesley K. Clark and Associates, and served on the boards of a number of other companies, including Amaya Gaming Group Inc. and Juhl Wind Inc.

In 2007, Rodman & Renshaw’s regular shareholders earned $3.6 million, in total. Shareholder losses totaled $5.5 million in 2010, and the next year, the bottom dropped out. The company reported that shareholder losses exceeded $36 million in 2011.

As chairman of the company, Clark was initially paid $250,000 a year and was given a 15 percent cut of any business he brought to the company, according to filings with the SEC.

But in October 2011, as the company’s assets plummeted, Clark declined to be paid any longer. In March, Rodman & Renshaw reported that Clark owned 17,300 shares of the company, which changed its name to Direct Market Holdings.

By May, shares of Direct Market Holdings were trading below $1 per share. That month, Clark resigned from the company’s board of directors.

In August, the Financial Industry Regulatory Authority fined the company $350,000 because its research analysts were not independent of its brokerage activities.

“The deficiencies in Rodman’s supervisory system created an environment in which the conflict of interest between research and investment banking was left unmanaged,” said Brad Bennett, the agency’s chief of enforcement.

In September, the company’s stock was dropped from the Nasdaq exchange; on Jan. 14, the company filed for bankruptcy.

Philip Kim, an attorney with the Rosen Law Firm in New York, has represented plaintiffs in class-action suits against companies that have used Rodman & Renshaw to execute “reverse mergers” to sell stock in Chinese companies on American exchanges.

In a reverse merger, a U.S. firm creates a “shell” company that doesn’t have any actual business operations. Rather than offer shares to the public through an initial public offering, the Chinese company merges with the shell company, which has already filed paperwork to be traded on a U.S. exchange, such as the Nasdaq or the New York Stock Exchange.

A problem with the arrangement, Kim said, is that underwriting companies such as Rodman & Renshaw, which bought shares in Chinese companies and then pitched them to American investors, have sometimes neglected to delve into the Chinese companies’ financial histories.

Some Chinese companies, Kim said, maintained two sets of books - one for Chinese regulators and one for market officials in the United States.

In many cases, he said, company directors secretly funneled money to insiders and relatives or failed to properly report their profits and losses.

Firms such as Rodman & Renshaw presented their Chinese portfolio as a way to hitch onto a growing market.

“People saw an opportunity to make money,” Kim said. “But as an underwriter, they have an obligation to conduct due diligence,” Kim said.

Rodman & Renshaw was famous in the New York investment community for throwing splashy investment galas. Clark would serve as host, and politicians like Clinton - who was paid $125,000 for one appearance - and stars like Blige wowed attendees with their star power.

Susan Krauss Whitbourne, a psychology professor at the University of Massachusetts at Amherst, said consumers and investors tend to trust celebrities. Rather than do the hard work of crunching numbers to determine the actual risk of an investment, they will seek guidance from people who are famous, no matter what their area of expertise.

Whitbourne said the celebrities who lend their names to “shoddy” investment deals also are harmed, because their reputations can take a hit.

“It sounds like everyone got fleeced,” she said.

Front Section, Pages 1 on 01/25/2013

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