Two investors who say they have been making big money shorting Chinese stocks listed in the United States, fronted up to their adversaries this week -- in a mood to swagger.

At an event in Beverly Hills attended by some of the bankers, auditors, promoters and lawyers who have made a living out of listing Chinese companies on U.S. exchanges, the short sellers were brutal in their assessment of how widespread fraud had become in the sector.

It's not a matter of whether they are fraudulent companies, it's just a matter of who they are cheating, 62-year-old Texas-based investor John Bird, who has been very public about his short positions, told a panel at DealFlow Media's Reverse Merger Conference 2011.

This is harvest time for our side. If you don't see a bunch of really wealthy guys up here, you're not looking close. This has been making more money than you can imagine, he said.

Andrew Left, who runs the website Citron Research and is also known for his short positions on Chinese stocks, told those attending he would love to go long on a Chinese stock if he could find one worth considering -- but he can't.

The market tells the story, he said smoking a Marlboro just after the panel discussion. If all of these stocks were up at their highs, and I'm the guy who's the short seller, who's the joke of the conference? Me. When I'm the short seller and I come in two years later and it's like attending someone's funeral, I think it's been decided who the victor is going to be.

Among the biggest blowups, New York Stock Exchange-listed financial software company Longtop Financial Technologies said last month its auditor quit, chief financial officer resigned, and it faced a probe by the U.S. Securities and Exchange Commission amid concern about alleged accounting irregularities.

In Canada, shares in Chinese forestry company Sino-Forest have lost more than 80-percent of their value, wiping out about $4 billion since the beginning of June following accusations by Hong Kong-based research firm and short seller Muddy Waters that its accounting is fraudulent. Sino has slammed the allegations as inaccurate and defamatory but says a full internal review will take up to three months.

The investors say they are convinced the shares of many of the Chinese companies listed in North America are going to sink because fraud is prevalent and accounts can't be relied upon.

The realization I have come to recently is that it's a giant Ponzi scheme. It's all going down, declared Rick Pearson, another investor who holds short positions on some Chinese stocks and who said he was meeting Bird for the first time in person when they had a five-course dinner in a swanky restaurant on the eve of the conference.

The 39-year-old Beijing-based trader and former investment banker says he lost a lot of money on his long positions in Chinese stocks before making winning bets against a series of companies that have been hit by allegations of fraud. They include probiotic food products company China Biotics Inc , which said on Wednesday it will not file its annual report on time because of serious issues raised by its auditors.

SQUEEZED HARD

The short sellers who attended the conference could be both confrontational and playful.

A few minutes before a session at which he was speaking, Bird handed out a traditional Chinese toy, known as a finger trap, to the audience. Amid nervous chuckles, the recipients found they could easily put their fingers into the trap's woven cylinder but found it much more difficult to pull them out.

While Bird described them merely as party favors they could also have been taken as a symbol for what has happened to investors who own Chinese stocks.

They have in many cases been trapped in a stock that is spiraling down or been suspended from trading as the short sellers have published research questioning whether accounts are fraudulent and even whether some operations exist.

The advisers who drove a boom in Chinese reverse mergers -- through which a larger company obtains a listing without going through an initial public offering by combining with an already-listed shell company -- acknowledge that conditions have got a lot tougher.

Those who have attended DealFlow's annual conference in the past said it used to be like a standing room-only course in reverse mergers for auditors, lawyers and bankers.

Anyone who's doing nothing but China right now is freaked out, said David Feldman, a partner at law firm Richardson Patel who frequently works as legal counsel on reverse mergers and has written a book on the subject.

The figures show how grim the reverse merger business has become recently. Both volume and dollars raised has fallen off. So far this year, there have been 29 reverse mergers of Chinese companies in the United States, compared with 47 in the first half of last year, according to data from PrivateRaise, part of DealFlow Media.

The deals have also been raising far less money. At the end of last June, Chinese reverse mergers had raised more than $200 million. So far in 2011, that figure is less than $13 million, according to the data.

Since March, more than two dozen China-based companies have disclosed auditor resignations or accounting problems, and there are now more than a dozen China issues currently halted from trading on U.S. exchanges.

DISAPPEARING CUSTOMERS

The agenda of this year's conference reflected the embattled focus of those still trying to make a living out of the sector. Pending SEC investigations and Congressional hearings, negative media reports and short-seller attacks were among the subjects tackled.

Among the earliest and best attended sessions was one featuring Mimi Justice, head of Deloitte's forensic and dispute practice in Orange County, California.

She told horror stories about dealing with Chinese companies, and their fears that anyone and anything can be bought for a price.

Deloitte -- one of the big four global accounting firms -- has been involved in accounting reviews in China where a company's finance department or some customers have simply disappeared, or an employee turns out to be an imposter, Justice said.

While those attending were remarkably polite toward the short sellers given the life or death struggle many companies are fighting against them, they were quick to suggest that reverse merger companies have been unfairly demonized.

Some pointed out that highly regarded companies -- such as Warren Buffett's Berkshire Hathaway -- were created through reverse mergers.

They also argued that while some U.S.-listed Chinese companies may have had some problems, that is the exception and not the rule, and suggested China is an easy target because of American resentment about its growth as an economic power and its clout as a big owner of U.S. debt.

I think with China, there's a total overreaction, said David Rees, a partner at Vincent & Rees law firm in Salt Lake City, Utah. It's an easy target.

One thing people at the conference kept coming back to was whether or not the reports issued by those shorting the stocks were accurate.

Most attendees were quick to say that they wanted fraud rooted out, but they became uncomfortable or even angry at the thought that someone could profit even if their allegations ultimately proved false.

What it comes down to is, is the information truthful and accurate? And, also, do you have an economic motive or an opportunity, assuming it's false…to profit personally because you're intentionally putting out this false information? asked Perrie Weiner, international co-chair of DLA Piper's Securities Litigation practice.

As to how long shorting Chinese stocks, whether they listed through IPOs or reverse takeovers (RTOs), will be a viable investment strategy, the shorts put various timelines on it.

Bird says he thinks it will last about another two years, Pearson only another 6-9 months.

The 40-year-old Left was more definitive: Chinese RTOs, rest in peace. What's next?

(Reporting by Clare Baldwin; editing by Martin Howell)