This page has been archived and commenting is disabled.

CHBT: Chinese Fraud Du Jour?

Tyler Durden's picture





 

Not even a full hour of trading can pass anymore without a fresh Chinese fraud getting exposed. Today's plunge target: China Biotics.

From BDOWatch:

Attn:
Jeremy Newman, CEO of BDO International
Holger Otte, Chair of Policy Board
Albert Au, Chairman and CEO of BDO Limited, HK

Your website states that the scope of audit at BDO extends “far
beyond number crunching”. BDO’s audit service claims to add value by
looking at the facts behind the numbers. The US capital markets are now
waiting to see if indeed BDO will give meaning to its words.

The US stock market is in turmoil over the chaos caused by a raft of
publicly traded Chinese operating companies reverse merged into US shell
corporations, which are increasingly beset by serious disclosure
issues. Many of these companies are posting some of the most astounding
financial results ever seen in public filings, but are riddled with
inconsistencies and/or utter lack of transparency in their business
models.

A prominent example is the $200 million market cap company
China-Biotics (NASDAQ:CHBT), an audit client of BDO Limited HK.
China-Biotics claims to be the dominant probiotics producer in China,
with a reported revenue run rate in excess of $110 million and an
alleged $130 million cash in the bank.

From a transparency standpoint, however, the company is nearly
impenetrable. There are gross inconsistencies between its financial and
tax filings in China and its SEC financial disclosures in the US. It
raised capital by asserting that it had built and opened over one
hundred branded retail outlets for which it claimed “a six month return
of capital”. But when allegations arose that the stores were
non-existent, the company immediately responded by claiming to have
recently shut them down. However, the company maintained the same
employee count, gross revenue, and net margins throughout the purported
opening and closing of over one hundred retail stores.

Over the course of eight years, China-Biotics has been involved in a
stunning 76 lawsuits, many of which were never disclosed. Certain
documents from these cases raise critical questions and red flags about
the company.

The company’s financial credibility is inextricably linked to the
faith the market places in the rigorousness of the auditing process. For
the sake of the integrity of the US capital markets, you are implored
to carefully consider SAS 99, the Consideration of Fraud in a Financial
Statement Audit. This statement requires the auditor to gather
information necessary to identify risks of material misstatement,
consider fraud risk factors, and evaluate at the completion of the audit
whether the accumulated results of auditing procedures and other
observations affect the assessment.

In particular, a degree of professional skepticism is required to
protect the shareholders and the investing public on whose behalf you
are engaged. SAS 99 specifically requires pro-active “brainstorming” to
identify areas where the entity’s financial statements might be
susceptible to material misstatement due to fraud.

We wish to draw your attention to the following warning signs as you begin risk assessment for your audit of China-Biotics:

1. SOURCES OF REVENUE
  1. Significant questions surround the sources of China-Biotics’
    revenue. For the quarter ended December 31st, China-Biotics claimed
    total sales of 32 million USD. For the nine months ended December 31st,
    the net sales was 81 million USD. Approximately 58% of revenue came from
    retail sales and 42% came from bulk additives.

    Major inconsistencies exist in China-Biotics’ reported numbers.
    The company met each quarter’s revenue growth targets despite claiming
    to have closed over 90% of its retail locations within the last year.

    According to a news article published in China by First
    Financial Daily News, Yicai, China-Biotics’ operation is significantly
    smaller than it claims to be. The author of the report contacted
    marketing personnel at Danisco, the largest probiotics producer in
    China. The Danisco marketing representative stated that he did not see
    how CHBT could conceivably sell over 80 million USD of probiotics per
    year.

    The author of the report also spoke with various supermarkets in
    Shanghai and was informed that they either never carried China-Biotics’
    products or ceased carrying them due to slow sales. Tesco specifically
    stated it had ceased to carry China-Biotics’ products due to slow sales
    and took small delivery only recently.

    On the bulk additives side, no disclosure of China-Biotics’
    major customers has been able to withstand independent verification. The
    Yicai journalist interviewed three major dairy manufacturers in China
    and all of them denied having an ongoing relationship with CHBT. CHBT
    recently announced that it started selling its products to Bright Dairy,
    but Bright Dairy representatives previously stated that they internally
    manufacture the probiotics used in their products and do not know CHBT.

    The evidence indicates that China-Biotics’ reported revenue
    numbers for both its retail/wholesale operation and its bulk additives
    operation are significantly overstated. This provides a basis for a
    thorough SAS 99 inquiry.

2. CASH
  1. Many stock frauds, for example the S-Chip and P-Chip scandals
    and the recent auditor resignation of Deloitte at China MediaExpress,
    revolve around falsified cash balances as a basis for fabricating prior
    years’ profitability. One common method is to “show cash” in accounts
    that is not the company’s own cash, but is in effect “borrowed”. Money
    is deposited into the company’s accounts utilizing a variety of
    undisclosed contingent liability arrangements either with the bank or
    undisclosed third parties.

    As a further concern, China-Biotics’ large reported free cash
    balances earn only .2%, far less than the income that would customarily
    be available to such a cash-rich entity. In 2005, China-Biotics was
    ordered by a Chinese court to pay an advertising company a little over
    $100,000 USD for services received. China-Biotics pleaded for an
    extension of time citing financial difficulty and insufficienct working
    capital. Yet, in the company’s 10-K filed in 2006, the Company claimed
    to have a cash balance of over $20 million USD

    Given the historic lack of transparency in China-Biotics’
    disclosures, thorough verification of its cash balances would be a
    foundation stone of a credible audit.

    Below is a link to the 2005 case document in which China-Biotics was unable to pay a small claim:
    http://www.scribd.com/doc/51518673/2005-3175

3. UNDISCLOSED LAWSUITS AGAINST THE COMPANY
  1. China-Biotics disclosed the U.S. class action lawsuits filed
    against the company, but it never disclosed the numerous lawsuits filed
    against the company in China, where its operation is based. CHBT was
    involved in a total of 76 lawsuits from 2002-2010 , with a significant
    portion of these claims being filed in Chinese courts.

    These lawsuits are material indications of the company’s historical operation and are required to be disclosed.

    http://www.scribd.com/doc/51518709/CHBT-Case-7
    http://www.scribd.com/doc/51518696/CHBT-Case-6
    http://www.scribd.com/doc/51518692/CHBT-Case-4
    http://www.scribd.com/doc/51518688/CHBT-Case-3
    http://www.scribd.com/doc/51518683/CHBT-Case-2
    http://www.scribd.com/doc/51518679/CHBT
    http://www.scribd.com/doc/51518673/2005-3175
    http://www.scribd.com/doc/51518669/2005-1899

4. DISAPPEARING RETAIL OUTLETS
  1. China-Biotics has always maintained that it operated over 100
    retail outlets in Shanghai prior to closing them down during the quarter
    ended September 30th, 2010. However, numerous interviews with current
    employees suggest that reality differs significantly from company
    statements. Specifically, store employees at CHBT’s existing retail
    outlets were quoted in a Chinese financial publication as stating that
    there are only six retail outlets in Shanghai. After China-Biotics
    posted a listing of its retail stores, extensive independent research
    was conducted to verify the legitimacy of these locations. No trace of
    an operational or recently closed retail store could be found at over
    95% of the locations listed.

5. LARGE NATIONAL AND INTERNATIONAL CUSTOMERS
  1. China-Biotics recently distributed a press release stating that
    it had expanded the categories of probiotics strains supplied to Bright
    Dairy. Yet according to the author of the Yicai report, Bright Dairy
    claims to have no ongoing business relationship with China-Biotics.
    Critical disclosures about CHBT’s largest customers for bulk-additives
    purchases, their concentration of business, and verification of major
    transactions being conducted at arms-length terms, are an absolute
    requirement of your audit.

6. MISMATCH BETWEEN SAIC AND SAT DOCUMENTS AND SEC FILINGS
  1. 1. The differences between China-Biotics SAIC and SEC filings,
    both of which are audited, can only be described as “grossly discrepant”
    with regard to any measure of revenue, assets and liabilities. More
    importantly, SAIC documents are audited by a local audit firm.
    Therefore, the company is deceiving at least one auditor.

    Original and translated SAIC fling:
    http://chinesecompanyanalyst.files.wordpress.com/2010/08/china-biotics-aic-filing-in-chinese-original.pdf
    http://chinesecompanyanalyst.files.wordpress.com/2010/08/chbt-aic-filings-in-english-translated2.pdf

    Any discrepancies between SAIC, SAT filings and SEC filings for
    China-Biotics should be considered material issues of your audit and
    should be reconciled. Verification of taxes actually paid to government
    authorities should be a basic reference point of your audit.

7. UNCERTAINTY REGARDING SIGNIFICANT TAX LIABILITIES
  1. China-Biotics has reserved a potential tax liability for which
    it would be obligated to pay over 50 million USD of VAT to local tax
    authorities. Over a span of six and a half years, CHBT owed taxes on 60%
    of total taxes payable. This accounting treatment is highly unusual and
    lacks transparency.

    BDO can provide a great service to the capital markets by
    delivering a full and fair audit, guided by its obligation to bring to
    the task a full measure of “professional skepticism” as mandated by SAS
    99. The market is counting on this to include an extensive independent
    review of the Company’s cash balances, including determination of any
    potential undisclosed liabilities, a full disclosure of outstanding
    taxation and historical litigation risks, as well as independent
    verification of revenue concentration issues from its largest customers.

Thank you in advance for representing the interests of investors.

Copies To:

Jeremy Newman, CEO of BDO International
Holger Otte, Chair of Policy Board
Albert Au, Chairman and CEO of BDO Limited, HK
Clement Chan, Managing Partner
Johnson Kong, Managing Partner
Jennifer Yip, Head of Assurance
Lesley Yeung, Deputy Head of Assurance
Hong Ng, Deputy Head of Assurance
Ringo Chiu, Deputy Head of Assurance

h/t Neal

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 04/11/2011 - 11:00 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

"TELLING LIES MAKES BABY JESUS CRY"....rod and todd flanders

Mon, 04/11/2011 - 11:05 | Link to Comment willien1derland
willien1derland's picture

I am certain that China-Biotics has filed to become a U.S. Primary Dealer as they apparently have the identical magmt style that such TBTF banks such as Citi, BoA, JP & da Wells - give it a week & Bennie & the Tims will launch that stock into the Russell 2000

Mon, 04/11/2011 - 11:06 | Link to Comment billwilson
billwilson's picture

Maybe they have a hidden melamine division that is genrating all the revenue. Who knew melamine was a probiotic.

Mon, 04/11/2011 - 11:31 | Link to Comment Creepy Lurker
Creepy Lurker's picture

+1

LMAO @ both you and willie. Anyone trying to seriously do business with the Chinese at this stage deserves whatever they get. They are still in the mindset that capitalism means defrauding everyone and his dog, something the Russians are just beginning to figure out is bad for business.

Mon, 04/11/2011 - 11:08 | Link to Comment bugs_
bugs_'s picture

be careful with shorting this one.  it has the same on-balance volume characteristics that shz had.  the obv did not confirm the move down - someone was taking it just above the ask.

Mon, 04/11/2011 - 11:58 | Link to Comment Bill Lumbergh
Bill Lumbergh's picture

Which move are you referring to in terms of time frame...OBV since February on this security has going down quicker than a cheerleader on...well you know the rest.

Mon, 04/11/2011 - 11:07 | Link to Comment cat2
cat2's picture

The only thing left in the world non-fraud is actual gold in your hands.  Anything else is likely fake.

Mon, 04/11/2011 - 11:10 | Link to Comment ml8ml8
ml8ml8's picture

If you're going to write a letter like that, why wouldn't you sign your name to it?  Why hide behind an apparently anonymous website?  Am I missing something here?

Mon, 04/11/2011 - 11:13 | Link to Comment AldousHuxley
AldousHuxley's picture

"Made in China" means defrauding American investors and consumers alike.

 

 

 

Mon, 04/11/2011 - 11:14 | Link to Comment Gordon Freeman
Gordon Freeman's picture

Anybody dumb enough to go long on a stock called China Biotics deserves what they get...

Mon, 04/11/2011 - 11:20 | Link to Comment FreedomGuy
FreedomGuy's picture

I got out of China stocks a few years ago for these very reasons. Here is the problem in a China or Russia. You have to understand that these were hard line Communist countries. You survived by lieing and telling your superiors or the government whatever they wanted to hear. It was a way of life. You used the black market to get necessities. The movie K-19 with Harrison Ford (historical movie) is a good example. Even though the countries are freed up a good bit, those habits, customs and instincts are not gone.

For example, if you were contracting for toys and asked if they would meet all U.S. regulations they would say "Yes (comrade)!" even if they don't know all the regulations. If you ask if there is lead in the paint used on them they will ask if that's bad and say no. When you find out there is they will just agree to fix it immediately and punish the supplier of the paint. They still execute people in China. I believe one of the heads of their pharmaceutical oversight was executed two years ago.

So, if you buy a shirt made in China the risk is small. You get a good shirt or bad shirt but no real risk. If you get your heparin or medicine or pet food the risk is much higher. Apply the same problem to accounting and disclosures for investing. How long do you even think business accounting has been a major in China? Unless a business has thoroughly trained Western type accounting and supervision an investor or buyer should be cautious. Western management includes management from Taiwan, Singapore, Hong Kong or other places, as well with long positive trade histories.

Mon, 04/11/2011 - 11:40 | Link to Comment kumquatsunite
kumquatsunite's picture

The movie K-19 with Harrison Ford (historical movie) is a good example. Even though the countries are freed up a good bit, those habits, customs and instincts are not gone.

_______

Exactly. Outstanding point. Now combine that with the unfettered tsunami of immigration, which has been forced upon our country in the last twenty years, and we have a real mess. This is frequently referred to as "red in tooth and claw" because third worlders do not play by our rules; do not stand politely in line; and do not believe in "sharing" with you.

 

Wherever I go now, the foreign accents of those waiting on me (bank, stores, everywhere!) is very scary. And their eyes are even scarier. They always are "eye-balling" me with hatred simmering just at the back, and please don't go all politically correct on me over this.

 

Not that long ago I was standing on a riverbank fishing with my son, a bunch of immigrants (didn't speak English) came along and threw their lines over ours and pushed us out. It was either leave or get ugly, and that's the point. Immigrants only care about themselves and about getting theirs, in whatever way they have to. 

Finally, while we have left in sixty million immigrants in the last twenty years (as well with "family reunification" how many really?) and who knows how many illegals that we are told we must legalize even as we are in ecological collapse of our water supplies, our ability to spring greater crops from the same amount of land while pouring more chemicals on that land, and while our once-beautiful cities like Los Angeles (or name any city/town in California) are turned into the proverbial Escape-from-LA wastelands of concrete and pollution that sears the lungs.

It is NOW that we must stop all immigration or we are doomed to being India or China with no fresh water, living like rats in the maze of hostility (see: Keeping adding a rat to the population and at carrying capacity they start eating each other). Funny how things have to become really awful like Chernobyl or Fukushima before human beings say, "OK, maybe we should do this different."

Mon, 04/11/2011 - 13:07 | Link to Comment Creepy Lurker
Creepy Lurker's picture

Really excellent post. Wake up people, shake off the public school indoctrination and get through your heads that we are not one big happy family.

And if you don't believe the purpose of public schools is indoctrination, plug the name Charlotte Iserbyt into YouTube and watch the interview.

Tue, 04/12/2011 - 01:39 | Link to Comment Irwin Fletcher
Irwin Fletcher's picture

Ye who listen to FreedomGuy, thy lover of western type accounting, who sayeth:

"Unless a business has thoroughly trained Western type accounting and supervision an investor or buyer should be cautious,"

and kumquatsunite, o lover of historical movies, who speaketh:

"unfettered tsunami of immigration"

"third worlders do not play by our rules; do not stand politely in line; and do not believe in "sharing" with you"

"Wherever I go now, the foreign accents of those waiting on me (bank, stores, everywhere!) is very scary"

"a bunch of immigrants (didn't speak English) came along"

"Immigrants only care about themselves," 

ye might consider ye olde sense of entitlement. Ye are in trouble when ye old shiite is swept oer ye olde thrusty breeze by way of spinning palm fronds.

Mon, 04/11/2011 - 11:31 | Link to Comment LostWages
LostWages's picture

Best to pull your money out of this dog and invest in the Chinese Dating Service advertised on this site.

At least you have a chance to get screwed in an enjoyable way.

Mon, 04/11/2011 - 12:03 | Link to Comment Bill Lumbergh
Bill Lumbergh's picture

Speaking of potential Chinese security frauds, PUDA was halted today after being hammered on Friday showing once again only hold securities in which you have some level of confidence in their operations.

Mon, 04/11/2011 - 14:11 | Link to Comment squexx
squexx's picture

I'm gonna buy the fucking dip!

Mon, 04/11/2011 - 18:35 | Link to Comment Dan The Man
Dan The Man's picture

.

5 yrs ago i asked my 'dude extraordinaire' about getting in on china.  

he says "why the hell do you want to get in bed with the chinese for?"  Aside from the juvenile humour moment, I took the hint and never bothered him about it again...wise dude.

Mon, 04/11/2011 - 19:39 | Link to Comment UninterestedObserver
UninterestedObserver's picture

This is my favorite stock - I shorted it at $17

Mon, 04/11/2011 - 22:47 | Link to Comment luckly123
luckly123's picture

Jersey City,nfl jerseys -- jerseychoice2u.com featured an mlb jerseys online attraction nhl jerseys system that can football jerseys provide help to nba jerseys people who are 2010 world cup looking for NFL Pro Bowl Jerseys the hottest girls pro bowl on the Internet cheap jerseys . The Online jerseys for cheap Game Internet Attraction cheap nfl jerseys System is the new youth nfl jerseys system that hockey jerseys will surely be Reebok jerseys a big hit to people dallas cowboys jersey who want to meet hot minnesota vikings jersey and pretty girls philadel phiaphillies jersey online.For men who new yorkmets jersey want to look for the best cincinnati reds jersey way on how to attract milwaukee bucks women, jerseychoic2u.com is probably atlanta hawks jersey the best place san diego chargers jersey that they can denver broncos merchandise look out. Recently, kansas city chiefs merchandise this website featured a new online attraction system that can provide help to men who want to meet the hottest girls on the Internet.

Jersey City,nfl jerseys -- jerseychoice2u.com featured an mlb jerseys online attraction nhl jerseys system that can football jerseys provide help to nba jerseys people who are 2010 world cup looking for NFL Pro Bowl Jerseys the hottest girls pro bowl on the Internet cheap jerseys . The Online jerseys for cheap Game Internet Attraction cheap nfl jerseys System is the new youth nfl jerseys system that hockey jerseys will surely be Reebok jerseys a big hit to people dallas cowboys jersey who want to meet hot minnesota vikings jersey and pretty girls philadel phiaphillies jersey online.For men who new yorkmets jersey want to look for the best cincinnati reds jersey way on how to attract milwaukee bucks women, jerseychoic2u.com is probably atlanta hawks jersey the best place san diego chargers jersey that they can denver broncos merchandise look out. Recently, kansas city chiefs merchandise this website featured a new online attraction system that can provide help to men who want to meet the hottest girls on the Internet.

Tue, 04/12/2011 - 01:39 | Link to Comment Irwin Fletcher
Irwin Fletcher's picture

Do your Dallas Cowboys jerseys come in green and white?

Mon, 04/11/2011 - 22:47 | Link to Comment luckly123
luckly123's picture

Today world babyliss straightener leading professional babyliss pro hair styling brand chi flat iron ghd announces pink chi flat iron the signing of chi hair dryer music sensation chi nano Katy Perry as ghd comb the new face ghd hair straighteners of the brand pink ghd hair straighteners. Working in close ghd iv styler hair straightener collaboration with ghd mk4 indisputably one of ghd purple the most talented new ghd rare women in music instyler rotating hair iron today, the association instyler rotating hot iron will kick off over t3 flat irons the next few months t3 hair dryer with an exciting t3 evolution hair dryer new multimedia bose headphones global brand monster headphones campaign recently monster beats by dr. dre headphones shot by world ghd straighteners renowned photographer hair straighteners David LaChapelle.GHD ghd store Qatar Manager Michael Kemp life electronics commented, "We are honoured to be recognised for a project that we have seen come to life from initial conception over the past few years.

Mon, 04/11/2011 - 22:51 | Link to Comment luckly123
luckly123's picture

It is enough designer shoes to make a grown shoes online woman cry.Top European designer shoes on sale, worth thousands high heels of dollars; remain in christian louboutin boxes and just out christian louboutin pumps of reach up a christian louboutin sandals quake ravaged christian louboutin mary janes retail store.3 News christian louboutin very prive was warned some christian louboutin platform pump women are already christian louboutin slingback talking of using christian louboutin men ladders to get christian louboutin heels at them.It christian louboutin boot would take more ysl than the highest yves saint laurent pumps stiletto heel yves saint laurent boot to reach them yves saint laurent shoes .Box after box,gianmarco lorenzi pumps containing top gianmarco lorenzi designer shoes from giuseppe zanotti boot Italy, Spain giuseppe zanotti platform and France have been given red stickers.

Do NOT follow this link or you will be banned from the site!