A hearty Audit huzzah to Barron’s and reporters Bill Alpert and Leslie P. Norton for a superb investigation into Chinese companies that list in the U.S. stock markets by reverse merging into American shell companies.

Sounds shady from the get-go, no? Well, here’s what Barron’s found:

A Barron’s study of the most seasoned 158 China reverse mergers shows that in the first three years of each stock’s trading, the median among them underperformed the Halter Index by a dismal 75%. The Halter index is composed of U.S.-listed Chinese companies, ranging from the American depositary shares of well-known names like Internet giant Baidu.com and telecom power China Mobile to small-cap reverse mergers. The median of those China reverse mergers lagged behind the Russell 2000 index of small-cap stocks by 66%. The billions in reverse-merger losses were shouldered by Chinese entrepreneurs, who thought they were raising capital the American way — and by American investors, who thought they were buying a piece of China’s prosperity.

But Alpert and Norton don’t leave it there. They tell us why these companies perform so miserably (emphasis mine):

Reasons for the stocks’ disappointing performance aren’t hard to find. The group has been a minefield of revenue disappointments and earnings restatements. Financial filings the companies make with the Securities and Exchange Commission often diverge from those filed with the Chinese government — by drastic amounts. Investor and analyst visits to corporate facilities in China reveal operations smaller and less impressive than shown in U.S. presentations. The companies too often select auditors who have previously signed off on the financials of companies that turned out to be busts. Some companies’ securities filings don’t disclose the involvement of promoters in China or the U.S., who — like Du Qingsong — have disquieting track records in the stock market.

These companies fall between the cracks of market regulation. The SEC’s enforcement staff can’t subpoena evidence of any fraudulent activities in China, and Chinese regulators have little incentive to monitor shares sold only in the U.S. Many reverse-merged companies admit in prospectuses that they haven’t gotten required approvals under China’s financial regulations.

In other words, this area is ripe for fraud. And there’s a lot of money involved: These reverse merger deals have been valued at a collective $50 billion, Barron’s reports.

It’s clear a lot of shoe leather was left on the streets to get this story. They find several characters here that you wouldn’t want to invest money with. One is Du Qingsong, imprisoned for four years in China and banned from the markets—but whose fingerprints are all over several of these reverse mergers. Another is Kit Tsui, whose NYSE-listed company has been accused by short sellers of being a total fraud.

The Hong Kong-based analysts, whose firm is Muddy Waters Research, said in their report that they visited Orient Paper’s factory in January and found it idle and dilapidated. They calculated that the company’s SEC filings overstated the value of its assets some ten-fold. Revenues were overstated 40-fold, the researchers estimated…

We also visited the address of Tsui’s firms, China Finance and China U.S. Strategy, in New York, near Rockefeller Center, but building attendants said the floor was vacant.

One thing I’d like to know more about is how and why investors put money into these firms. Barron’s has this:

Among the frequent participants in such deals are Pinnacle Adviser’s Barry Kitt, Barron Capital’s Andrew B. Worden and Guerilla Capital’s Peter Siris, who’s talked about his Chinese stock holdings with this magazine.

Plano, Texas-based Kitt has invested in dozens of China reverse mergers — often taking the lead position in the private placement. When executives of China Green, the fertilizer company that had initially merged with the company controlled by Du Qingsong’s son, rang the opening bell at their NYSE listing in April, Kitt was beside them on the balcony. In the reception that followed, Kitt thanked China Green for letting him invest. Kitt refused an interview and after he received e-mailed questions, our messages were blocked from his e-mail system.

I’m still not clear on why he’d do such a thing, or if the losses are being passed on to other investors.

But make no mistake, this is a terrific investigative piece.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.