'China Hustle': Skippack businessman exposes stock fraud in new documentary

This just in: Watch your wallet, because if you're not careful somebody on Wall Street may pick your pocket.

One of the latest schemes is revealed — with the help of Skippack businessman Dan David — in The China Hustle, which details how fraudulent Chinese companies and U.S. investment banks used loopholes in U.S. securities laws to scam investors out of billions.

The film examines the practice of reverse mergers — a sleazy Chinese company buys the legal shell of a dead or moribund U.S. firm (often a bankrupt mining company), and begins to list on a U.S. stock exchange. This means the company does not need to submit the rigorous financials that accompany an IPO.

>> Read more: Philly investor is a documentary film star on 'The China Hustle'

Also, the merged entity can use Chinese accounting standards (invoking the brand names of respected U.S. firms), which is to say, it can lie — inflating revenue and earnings and profiting from the inflated stock price, and relying on U.S. banks to hype the stocks.

In the early days of the run-up (not long after 2007 financial crisis), the dimensions of the scam were unknown, and David — featured prominently in the film — and his firm GeoInvesting profited from the early gains. He was also one of the first to suspect that companies were fraudulently overstating their financial health. So David and others became short sellers — that is, they began to make bets that the prices of these phony firms would fall, and they made sure that happened by publicizing the scathing results of their own research into the actual financial condition of these firms.

David went further — he tried to interest his elected representatives (specifically U.S. Sen. Pat Toomey) in the nature and scope of the fraud, with the goal of tightening U.S. securities laws to prevent abuses in the reverse-merger process.

No such luck. In fact, legislators and regulators are rolling back regulations designed to protect investors, who in this case are estimated to have lost $100 billion to phony Chinese firms.

China Hustle estimates the cost to retirees' pensions alone is $14 billion, and wonders, along with David: Where's the outrage?

Certainly $14 billion is a disgraceful sum, but it's actually less than the $17 billion a year Wall Street firms legally divert from retirement accounts simply because most investors don't understand compound interest, expense ratios, or the fee structures used by firms hired to manage their retirement accounts.

David was unable to make that case to his elected representatives. So he's trying to become one – running for Congress as the GOP candidate in the new Fourth Congressional District in Montgomery County.