How US investors are losing millions to fraudulent Chinese stocks on Nasdaq

Nasdaq

When Braden Lindstrom, a Utah college professor, was urged by a fake financial advisor to invest in a little-known Chinese shipping company, he didn’t expect to lose $80,000. But Lindstrom’s purchase of Jayud Global Logistics stock — which soared then crashed 96% — is part of a growing pattern: small Chinese firms listed on Nasdaq are being used to carry out coordinated pump-and-dump frauds that are ensnaring US investors, the Wall Street Journal reported.

A growing epidemic with cross-border complications

The scams have become so frequent that US regulators, facing difficulties accessing evidence in China, are now enlisting the Justice Department. These schemes involve real Chinese companies, many of which go public on Nasdaq with minimal scrutiny, raising just $15 million or less. Over a third of these firms have seen their stocks lose over half their value in a single day, according to FactSet data.

Justice Department officials say fighting this fraud is now a priority. “We’re identifying and rooting out bad actors, deterring misconduct, and recovering victim funds,” said Matthew Galeotti, head of the DOJ’s criminal division.

Manipulative trading and coordinated deception

The playbook is familiar: fraudsters use Facebook or WhatsApp ads to direct unsuspecting investors to buy into little-known stocks. Promoters often promise big acquisitions or hidden value. Share prices rise temporarily through manipulated trading, while insiders or their affiliates — who often buy the shares at steep discounts — offload their holdings for massive profits.

One recent case involved China Liberal Education Holdings, which raised $21 million and allegedly became the centre of a scam that netted $480 million through such a scheme. Seven traders were charged in March with fraud after dumping 50 million shares on the market. Nasdaq has since suspended the stock.

Nasdaq under pressure, investors band together

Despite rule changes meant to delist risky companies more quickly — such as faster removal of stocks that trade below $1 — critics argue Nasdaq has enabled this behaviour by allowing low-quality IPOs to list in the first place.

Investors like Lindstrom are trying to fight back. He and 95 others formed a support group after losing a collective $9 million to the Jayud scam. Some were promised that “Cash Cow 5” (as Jayud was called by promoters) would soon be acquired by shipping giant Matson. That never happened.

Another investor in California lost $320,000. A third, in Missouri, said he trusted Facebook to screen scam ads. Meta, which owns Facebook and Instagram, said it is testing facial-recognition tools to block fraud but added that real solutions will require coordination between governments, banks, and tech companies.

More names, more victims

Other companies under scrutiny include Lixiang Education Holding and NetClass Technology, both of which experienced meteoric price spikes followed by spectacular crashes. In the case of NetClass, the stock rose from $5 to $51 in just a few months before plummeting to $2. Short sellers, lured by the price spikes, often become unwitting fuel for the fraud as they scramble to cover their positions.

“The only way you can absolutely kill your career is by trading these,” said trader Nathan Michaud, who has tracked these pump-and-dump schemes online.

While US authorities have recovered some of the illicit profits — such as $214 million seized in the China Liberal case — much of the damage is already done, with average investors left holding worthless shares and few avenues for justice.