I was surfing on Hulu on a Friday night in hopes to find something entertaining to watch. After 5 minutes of navigating all the genres listed, I came across a Documentary called "China Hustle". I took a look at the preview and decided to watch it.
I'm glad I stumbled upon this documentary as the movie is about a MASSIVE FRAUD that has found its way in AND around the U.S. Financial system. This fraud is skimming some $14 billion from Americans' public pensions.
This is how the fraud works: Just after the financial crisis, several hundred Chinese companies were able to list on U.S. exchanges through a process called a reverse merger. Unlike an IPO that requires a high level of scrutiny, a reverse merger allows companies to enter the markets without the same level of scrutiny. Specifically, the reverse merger allows a Chinese company to merge with the shell of a defunct but still legally extant company here in the U.S. and takeover their listing.
Why does it matter? Since there is less scrutiny, a lot of the financials assertions made by these Chinese companies were false. "The perfect example of this con game is a company called Orient Paper, which claimed to be shipping tons of high-quality paper all over China, with revenues of $100 million annually. When a potential American investor went to check out the factory, he discovered it was on a poorly maintained country road that could not support the large trucks Orient was allegedly using to transport its product. Inside the factory, he discovered numerous broken machines, garbage rotting in the front yard, heaps of rotting cardboard everywhere. The American, Carson Block, called the business “a complete sham,” and wrote a report about his findings, which ultimately led to a collapse of Orient’s stock."
There are many more of these fraudulent companies being traded and making its way into retirement funds. Today, over 100 Chinese Companies are traded on U.S. stock exchanges with a combined value of more than 1.1 Trillion dollar.
This is why I like investing in multifamily because its real and the investment and business strategy is easy to understand. More importantly, I know exactly what I am investing in. I can't say the same thing with pension/mutual funds where one fund can invests in over 128 stocks. There's no way any investor can track and understand all the companies that the funds invests in. I guess this is why there's a "fund manager" to help manage the holdings. If this is the case and if they are doing their job, then how are these fraudulent stocks makings its way into these funds? Do you know what Companies your funds are invested in? Might be a good time now to do a cursory review. Happy Investing!