Time For Chinese Fraudcaps To Exit Stage Left

Tyler Durden's picture

One of the most unbelievable developments in the past few days has been the rank, unprecedented, totally amateur and outright pathetic backlash against writers of "short China" theses by the management teams of these same companies that have garnered the all too deserved definition of "Fraudcaps." We have shown before that the hit rate of pieces accusing Chinese companies is well north of 80% as exhibited by the fact that virtually all companies currently halted indefinitely on the Nasdaq are of Chinese origin. But of course, the fact that their stocks plunge only after an investor who has actually done their homework exposes Chinese frauds for what they are, does not prevent these companies to stoop to the lowest rung on the ladder and actually sue these contrarians who in the long run merely prevent further capital erosion from future lazy momos who may have invested in these crap companies. It is time for these smokescreening, grautious, shareholder fund-depleting lawsuits to stop, and for shareholders to instead sue their management teams.
After all, if these allegations are so wrong, than it is the fiduciary
duty of the management team to buy back as much stock as humanly
possible, using both corporate and personal funds
: if there is no fraud, this represents a massive discount to fair value and the highest IRR investment these clueless fraudulent management teams can pursue.
Commit
fraud once, with the help of the NYSE and Nasdaq, that's fine - the
idiot momos who buy your shares will lose everything, but continue this
charade and CEOs deserve to go to jail immediately, hopefully while ignoring the completely toothless SEC which has failed and continues to fail
miserably when it comes to protecting shareholder interests, especially in this most recent Chinese fraud contagion. Also, we leave the question of when any incompetent sellside banker will be sued for peddling a BUY rating on Chinese fraud completely open...

The latest example of such a legal backlash is Alfred Little whose work Zero Hedge has posted in the past, exposing such alleged frauds as Deer and Sino Clean Energy. Bloomberg reports: "Deer Consumer Products Inc. and Sino Clean Energy Inc. U.S.-listed Chinese companies battered by fraud allegations in online reports, are blaming their big share slides on a blogger who uses the pseudonym Alfred Little. The two firms have filed defamation lawsuits in New York against “Little” and websites that published his blogs. The cases are the most significant efforts by Chinese companies that trade on U.S. exchanges to fight back against bloggers and short sellers who have questioned their accounting practices."

Next, enter the smooth-talking law guys, who charge these alleged frauds about $500/hour to present their case to the court in a smokescreen deflecting public attention from what is nothing short of investor fraud: "There’s no question there is some fraud in China, but some bloggers are taking advantage of the perception that it’s widespread,” said David Feldman, a lawyer at Richardson & Patel LP in New York, which has worked for Chinese companies listed on U.S. exchanges including Sino Clean Energy. “The folks who are making stuff up to drive a stock down, that is criminal, and the companies have to defend themselves." Hey David: take a look at this list and tell us it is not widespread.

Let's recall what happened the last time one such confirmed fraud went after the author of a post that appeared on Zero Hedge the very first day it came out: Gerova Financial Group, from back in January 10. A week later Gerova, with much pomp and circumstance announced it hired some consultancy firm to prove "disinformation."

Gerova Financial Group, Ltd., the Bermuda-based diversified financial services company, said today [Jan. 18] it has retained the services of Kroll, the leading global intelligence and risk analysis firm, to investigate possible market manipulation and collusion aimed at driving down the price of Gerova’s stock.

Gerova intends to make public the findings of the investigation.

At issue is a January 10 document circulated by Dalrymple Financial LLC, which purports to be an “independent” and “impartial” investment advisory firm but is “merely a vehicle for a disinformation campaign orchestrated by Keith Dalrymple, a sometime securities analyst with a questionable regulatory background”, according to Gerova.  Other than the Gerova document, no other “reports” are available on the Dalrymple website.

The Dalrymple report attacked the firm as “likely fraudulent”, while a blog on financial website “Forbes” claimed Gerova has “close ties” with a $53 million international ponzi scheme.

“The Dalrymple document, printed and laid out to resemble a report by a reputable securities firm but offering no address or phone number and published on a website in Bulgaria with an anonymous owner, is replete with materially false information and reaches a series of speculative and unsupported conclusions aimed at damaging Gerova in the marketplace by driving down its stock price,” said a company spokesman.

“Dalrymple’s claims that the company has acquired overvalued assets are not true,” said a Gerova spokesman. “On page 18 of the 19-page document, the author finally reveals his motive, disclosing that the firm has a short position in Gerova stock — meaning it profits if the shares fall in value.  The short interest in Gerova stock more than doubled during the first half of December.

“Short selling is legal and can be a useful check on stock market excess, but if undertaken in tandem with the coordinated dissemination of false information it crosses the line into market manipulation.”

Alas, there was nothing to make public, and there was no manipulation: GFC was halted indefinitely two months later and now trades on the pink sheets at $0.40. Oh yeah, those consultants sure showed Dalrymple...

The bottom line is these legal cases are nothing but shareholder funded withhunts while management teams make plans to escape to some non-extradition country. After all just how moronic do these management teams have to be: If the reports were meritless, and not credible there would be no impact on the stock price! And as noted above, if indeed the price indicates a mispricing, and the management teams are convinced that they are the object of a "manipulative attack" then it is their duty to buy every share they can, both with company and with their own personal money. Oddly, neither Deer nor Sino Clean have done any of this (to our knowledge). If anything, these desperate attempts to deflect attention only bring out even more shorters.

How long before these fraudcaps learn that you came, you saw, but when you are exposed, you close up shop and hope you don't get arrested at the border? In the meantime, Zero Hedge will continue to proudly present each and every negative thesis which should stand on its own merit.