Exclusive: A U.S. fix sought for long Chinese stock halts

NEW YORK (Reuters) - The U.S. securities industry and its regulators are trying to fix the problems caused by lengthy trading halts of U.S.-listed Chinese companies that have been suspected of accounting fraud.

With the number of Chinese securities halted on U.S. exchanges growing, stranding investors who are unable to close out positions, a Securities Industry and Financial Markets Association (SIFMA) spokeswoman said it is "exploring this issue and studying possible solutions."

SIFMA, U.S. securities regulators and exchanges all held various talks over the last few weeks, according to a source unrelated to SIFMA. They wanted to deal with halts of shares that have stretched for several months while exchanges wait for delayed regulatory filings or resolutions to audit probes.

One possible solution discussed included matching outstanding long and short positions in the halted securities, and reporting them as formal trades, said the source, who was familiar with the discussions but unable to speak publicly.

The halts can prove costly for investors caught holding the securities -- long positions -- and even for those who borrowed the securities to bet on a decline -- the shorts.

It was unclear whether a final decision had been made.

The Financial Industry Regulatory Authority (FINRA) declined to comment. The Securities and Exchange Commission did not immediately comment.

Numerous U.S.-listed Chinese companies, many of which first listed on U.S. exchanges through reverse takeovers, have been hit with charges of accounting fraud. When companies respond to allegations, shares are often halted for weeks or even months as they investigate.

But the trading halts created a skid row of sorts of Chinese companies languishing on exchanges without trading for several months. There are currently more than a dozen such companies at the Nasdaq Stock Market and the New York Stock Exchange.

PAIN ALL AROUND

Investors in companies that have been halted have been unable to close out positions because trade halts have stretched for months. One Chinese company, NIVS IntelliMedia Technology Group, has been halted since March 24.

"We're aware of what's happening and it's appropriate that when there's fraud these names be delisted," said Dan David, vice president at Geo Investing in Skippack, Pennsylvania, which is short several Chinese stocks that listed in the United States after a reverse takeovers.

"I wish it didn't take so long, anyone who happens to be short these names are charged a great deal of interest," he said. It's kind of funny -- people who were long on these names got hurt, and the people who were short feel pain as well."

Shares of Chinese companies have been hit hard, with some losing most of their value, as a result of the fraud allegations. The Canadian-listed Chinese forestry company Sino-Forest is down more than 90 percent since allegations were raised by a short-selling research firm.

Normally, an individual company can have shares halted for a few hours so a company can disseminate news or the exchange can resolve a trading-related issue.

But when NYSE Euronext and Nasdaq OMX Group decide there is no reliable financial information on a company, the shares are halted and sometimes headed for delisting. If the company appeals, however, their shares will remain halted until there is a resolution.

(Reporting by Jonathan Spicer; additional reporting by David Gaffen and Ryan Vlastelica; editing by Gunna Dickson, Dave Zimmerman)