US regulators are intensifying their focus on professional services firms accused of enabling suspected Chinese “pump and dump” scams. The U.S. Securities and Exchange Commission (SEC) last week launched a task force to investigate U.S.-based “gatekeepers, particularly auditors and underwriters,” that may have facilitated securities law violations involving companies from foreign jurisdictions such as China.
The move comes just a day after Nasdaq unveiled new measures to tighten trading standards amid concerns over a surge in fraudulent schemes. Pump-and-dump scams typically involve promoters artificially inflating a company’s stock price before selling off their shares, leaving ordinary investors with steep losses.
The SEC’s Crypto Task Force will also hold a roundtable on surveillance and privacy, showing the agency is stepping up oversight in both traditional markets and crypto.
Billions Lost in Recent Scams
The Financial Times recently reported that investors have lost billions of dollars betting on small Nasdaq-listed Chinese companies that were aggressively promoted on social media. Analysts say many of these listings were enabled by smaller underwriters, auditors, and boutique law firms rather than the so-called “bulge bracket” banks.
“[Regulators] are going to crucify the bilge bracket,” said a person familiar with the SEC’s thinking, referring to the small groups accused of acting as conduits for questionable Chinese listings. “This is a national security issue, that’s what the SEC’s focus is.”
Academic Research Raises Red Flags
Concerns about these practices are not new. A 2023 study by researcher Stephen Walker and Ian Gow of the University of Melbourne found that Nasdaq IPOs linked to a cluster of underwriters and auditors delivered “substantially worse returns” for investors.
“If you want to clean up Wall Street, go after the auditors and underwriters who make the [pump and dumps] possible,” Walker told the FT. “Billions have been incinerated.”
Doubts Over SEC’s Capacity
Not everyone is convinced the new task force will be effective. Bill Singer, a lawyer and former regulatory attorney at the American Stock Exchange, argued, “If you really want to go after misconduct and crime in the securities industry, perhaps the least effective way of doing it is by creating a task force. It dilutes everything. The best way to do it is to hire a veteran attorney and an investigator and let them build a case.”
Nasdaq Raises the Bar
Meanwhile, Nasdaq has introduced a new rule requiring Chinese companies to meet a minimum $25 million public offering size, a move intended to weed out dubious applicants.
A boutique New York bank executive noted that the tougher stance had already discouraged listings. “It was becoming a headache,” the person said. “We haven’t got any more [Chinese IPOs] lined up.”
Also Read: U.S. Treasury Sanctions 19 Entities Over Crypto Scams
