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John Zhao, CPA of Patrizio & Zhao, LLC Speaks to Wall Street Investors

Maxim Tries to Resuscitate Investor Interest in China With Accounting Issues Dinner

Investment bank Maxim Group, which has arranged at least seven PIPEs for Chinese companies worth $141 million since 2009, hosted a dinner on Oct. 18 for investors interested in learning about the accounting issues of Chinese companies, in an effort to resuscitate a once promising market.

The PIPE market for Chinese companies has contracted sharply in 2011 from the boom years in 2009 and 2010, as fraud allegations against Chinese companies that went public in the U.S. through reverse mergers and raised money through PIPEs started surfacing. Some of the more prominent fraud allegations included those against PIPE issuer and timber producer Sino-Forest Corp. and against Orient Paper.

New York-based Maxim is tied for fourth in the placement agent rankings for China PIPEs with Global Hunter Securities and FT Global Capital. They trail Rodman & Renshaw, which has arranged 30 China PIPEs worth $630 million; Brean Murray Carret & Co., which has arranged 13 worth $447 million; and Roth Capital Partners, which has arranged 12 worth $440 million.

"They're being proactive to address investor concerns and rebuild their comfort level with Chinese equities" after all the fraud allegations, said Kevin Pollack, a managing director ofParagon Capital Advisors, which has invested in a number of Chinese reverse merger companies, and who attended the dinner with about 15 other investors at a restaurant in Manhattan called Nino's Positano.

The dinner was hosted by Maxim's senior China research analyst Echo He, who covers companies including Youku.com Inc., Harbin Electric and Renren Inc.

It featured a discussion and question-and-answer session with John Zhao, the founder and senior partner with Patrizio & Zhao, a Parsippany, N.J.-based accounting firm that represents about 10 Chinese companies.

Jason Goldstein, a senior vice president of institutional sales at Maxim Group, didn't return a telephone call from The PIPEs Report seeking comment.

Goldstein said in the invitation to the dinner that Zhao "has been working on small/mid-cap Chinese companies since 2005. He has more than 15 years of public accounting experience. He holds a Bachelor's degree from Tsinghua University and is a licensed CPA in the state of New Jersey. Since Mr. Zhao is often involved at the very early stages of Chinese companies' public listing process, his first-hand knowledge is a good resource for deeper analysis of Chinese companies."

For two hours, Zhao discussed the technical and regulatory issues surrounding U.S. listed Chinese companies. He answered questions on topics such as how Chinese companies view the U.S. capital markets at this stage, how they file local taxes, how they borrow from local lenders and buy land from the government, and how they pay suppliers and collect from customers.

Pollack said Zhao told the investors that he has turned down business from potential Chinese clients because of concerns about fraud, which "makes him appear more concerned about maintaining his reputation, whereas some other small audit firms may be less discerning because they're more dependent on those paychecks to survive."

Also in attendance at the dinner was George Boltres of Boltres Investment Partners; Thomas Kirchner, manager of the Quaker Event Arbitrage Fund; William Prather ofBlackRock; and Ray Wong, an analyst at Vision Capital Advisors, Zhao told The PIPEs Report.

"I told them not to be mystified by China," Zhao said. Chinese "companies may not be frauds, just strange to Americans. I call them irregularities, rather than frauds. What's normal to Chinese people is abnormal to Americans."

Zhao said he urged the investors not to judge all Chinese companies by the few bad apples that have emerged.

Finally, he noted that it wasn't just the Chinese companies who are responsible for the problems. He said it was also the investment banks who "rushed the deals to the market." He said it became "a quality-control issue." 

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