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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.

 

 

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Wed, 06/08/2011 - 15:57 | 1352143 TruthInSunshine
TruthInSunshine's picture

Shit's about to get real, bitchez! Not just in China.

 

Wed, 06/08/2011 - 18:59 | 1352867 Weisbrot
Weisbrot's picture

are the Chinese executing those committing the fraud? 

if not then the Chinese government is giving this activity their blessing.

Wed, 06/08/2011 - 15:58 | 1352151 buzzsaw99
buzzsaw99's picture

How is C or AIG less of a fraud?

Wed, 06/08/2011 - 16:00 | 1352160 chrisd
chrisd's picture

At the very least there are physical locations for Citi and actual policies of AIG. There are significant assets

Wed, 06/08/2011 - 15:58 | 1352166 buzzsaw99
buzzsaw99's picture

Enron had all that stuff too.

Wed, 06/08/2011 - 16:08 | 1352207 TruthInSunshine
TruthInSunshine's picture

Enron - great commercial, and so appropro:

Enron Commercial - Ode To Why

Should have been titled "Why not?"

LULZ.

Wed, 06/08/2011 - 21:13 | 1353211 max2205
max2205's picture

Go to jail?? Pppplease! Never happen. Check Papst beer selling shares on Facebook. Of course the SEC stopped this but only because a porn site link sent them there.

I look for a undeserved short squeeze on all things china before long

Wed, 06/08/2011 - 23:09 | 1353500 euclidean
euclidean's picture

Add GM too if you please, but then these US firms is not fraud - it's US government magic.

GM + AIG + C = G MAGIC (someone can be a bit more clever)

I'm convinced all these collosal $billion US failures is just alphabet soup. Somewhere there's an acronym hidden within. That spells "THANK YOU FOR PLAYING" or something similar.

Anyway, imitation is the sincerest form of flattery. You can't help the poor Chinese in copybook IPO's. They have been shown by the best.

Wed, 06/08/2011 - 16:00 | 1352171 Cdad
Cdad's picture

What I'd like to know about this situation is at what point in time will Duncan Niederauer's head finally be hanging in shame, as he takes his afternoon constitutional in the room next to where the co located, sheeple shearing computers are, while on break from destroying capital or selling the floor of the NYSE to the Germans...when will his head be hanging so low that he simply does not come to work anymore?  A grateful nation awaits another important resignation.

As for the Chinese guys selling fraud...ummm...they're Chinese guys.  Duh.  Does the phrase "commi bastards" resonate with anyone anymore?

Wed, 06/08/2011 - 17:39 | 1352583 NotApplicable
NotApplicable's picture

I think the phrase "Chinese Mafia" would be more apropos, not to mention attract fewer junks. Of course, the word mafia should always be used in relation to external government, as it is merely the most organized form of crime.

Wed, 06/08/2011 - 18:32 | 1352737 Cdad
Cdad's picture

Sorry...I do not suffer from the condition known as Political Correctness.  I have no regard for communists, be they in China or at the Federal Reserve Bank.  I also despise fascists and Marxists, too, and would gladly refer to them equally as bastards...if that helps.

Neither do I concern myself with junks.  I happen to know that there are plenty of fellows from Hong Kong here on the Hedge posting their nonsense/disinformation, building their absurd conversation trees...with themselves.  Clutter monkeys, I call them.  Probably an insult to monkeys.

If you are looking for "preferred nomenclature," you have the wrong guy.

I would say that I do NOT understand why America is not currently in a full blow trade war with China right now.  Being in business with China has cost America dearly.  However, I DO understand why we are not in that trade war...yet...but I suspect we will be in due course.  And on that day, I'll be throwing a party to commemorate the kick off.

The fact that China is allowed to participate in our markets is disgusting to me.  The fact that they have promoted profligate spending through the years via their treasury purchases infuriates me.  Because I have sons who will inherit the mess we are now in, I would much prefer to break all ties with China now, take the pain that would come from the transition, and leave the Chinese folk to buy their own poorly manufactured goods...so that I could have a sense of renewed hope in America...the one I grew up in.

Sorry if that does not fit in with your understanding of where things are truly at in the grand scheme of US/China relations.  Maybe there is some brain dead, Apple zombie out there in ZH to comfort you.

 

Wed, 06/08/2011 - 19:57 | 1353001 FrankDrakman
FrankDrakman's picture

Buddy - if you think the Chinese are communists, you probably still the Republicans are capitalists.

Wake up and smell the civet-processed coffee: they're both protection gangs (Democrats too) looking for more defenseless souls to loot.

Wed, 06/08/2011 - 20:34 | 1353101 Cdad
Cdad's picture

The Chinese live under a central planning regime that continues to build houses in unpopulated cities and regularly fudges all of its economic data releases for the purposes of keeping up appearances regarding its economy.  As long as Chinese folk continue to be just that...tools working for pennies for the establishment...my definition of Chinese communists shall suffice for now.

If you had ANY ability to read between the lines, you would have known, prior to posting your comments, that I do not support the current nonsense going on in America any more than I support Chinese communist regimes.

I stand for the forgotten things, the Constitution of the United States and a Representative Republic...both of which are currently being boot stomped into the ground here in America.  I do not worship at the church of the left or the right, but rather in God's house who, according to my founding fathers, bestowed upon me my liberty, my God given right to be free of tyranny, including but not limited to idiot DC nanny state politicians, Federal Reserve fractional Banks, and crony capitalism.

And I'm not your buddy, short stuff.

 

Thu, 06/09/2011 - 09:28 | 1354157 aerojet
aerojet's picture

China remains a communist country despite all the PR to the contrary.  Regular people in China live behind an iron curtain where any anti-government activity is rooted out and extinguisehd.  That is not a free country!

As far as pussy-footing around with Marxists, wtf?  I would shoot every one of them if I had the chance. 

Wed, 06/08/2011 - 16:05 | 1352194 carbonmutant
carbonmutant's picture

Do you think an SEC investigation would encourage the Central Government to buy more treasuries?

Wed, 06/08/2011 - 16:09 | 1352212 TruthInSunshine
TruthInSunshine's picture

What is this 'SEC' that you speak of?

I've been around a while, and am unfamiliar with this, what must be, obscure entity...

Wed, 06/08/2011 - 16:56 | 1352416 carbonmutant
carbonmutant's picture

Political enforcement arm of the current administration

Uses federal securities laws to harass political opponents.
Wed, 06/08/2011 - 17:24 | 1352497 TruthInSunshine
TruthInSunshine's picture

Ahhh! I have heard of them!

They also 'screen' porn for potential hazards!

God Bless the SEC!

Wed, 06/08/2011 - 17:44 | 1352589 NotApplicable
NotApplicable's picture

One never can tell what's being traded in those vids, so it's a good thing they're on the job!

Wed, 06/08/2011 - 16:09 | 1352213 Thisson
Thisson's picture

Ratings are opinions.  There is no legal liability for opinions, even negligently informed ones. 

Wed, 06/08/2011 - 16:13 | 1352230 Ergo
Ergo's picture

That's how scare tactics work though.  You can win a suit.  But you have to hire a NY lawyer to do so, and they're not cheap. 

Wed, 06/08/2011 - 16:14 | 1352222 MisterKurtosis
MisterKurtosis's picture

Heh and now the big See No Forest, I mean Sino Forest, is under investigation.

Wed, 06/08/2011 - 16:15 | 1352226 Ergo
Ergo's picture

Hooray, Hooray for Zero Hedge - the best of the free net!

Wed, 06/08/2011 - 16:24 | 1352262 Jason T
Wed, 06/08/2011 - 16:31 | 1352299 tallen
tallen's picture

So did CBEH, look what happened to them.

 

They have $70m (supposedly) of cash on the books and they can only afford 250,000 shares?

Go watch the videos on VIMEO and it'll explain to you why SCEI is a fraud.

 

If it wasn't a fraud, they'd take the company private with that cash, the insiders would be racking up huge debts buying shares. I mean a P/E of 1? I'd max out credit cards.

But no,  it's a fraud.

Wed, 06/08/2011 - 17:46 | 1352605 NotApplicable
NotApplicable's picture

Just don't try explaining that to a lawyer. It'll just make them mad.

Logic in my legal land? Ha! Not a chance.

Wed, 06/08/2011 - 16:25 | 1352269 wombats
wombats's picture

Buyer beware!

Wed, 06/08/2011 - 16:43 | 1352347 espirit
espirit's picture

Kapitalism just caught up with China, exit stage left to... Africa.

Wed, 06/08/2011 - 16:51 | 1352349 Hedge the WORLD
Hedge the WORLD's picture

SEC = Securities and Exchange Corrupted

Wed, 06/08/2011 - 16:44 | 1352375 Hedge the WORLD
Hedge the WORLD's picture

SEC is a like a scarecrow in the farmland. It maintains terror in the intimidated people, but for the risk-taking people it is nothing but an ineffective entity which is nothing to be concerned about.

Wed, 06/08/2011 - 16:46 | 1352378 Franken_Stein
Franken_Stein's picture

 

Bravo Zerohedge, Tyler Durden & Team.

You rock !

Fraud, lies and theft wherever one looks.

Clearly, this swamp must be dried up and the rats smoked out of their holes.

 

This whole corrupt ramshackle house of financial cards must be brutally cleaned with an iron broom.

 

That's why I say it's time for shareholders to storm annual meetings and turn everything upside down there, shout down CEOs, throw shoes and so on.

 

Wed, 06/08/2011 - 17:46 | 1352619 NotApplicable
NotApplicable's picture

You know, if they're going to taze people for merely asking uncomfortable questions, you might as well get a shoe or two in before getting zapped.

Then again, after the first time, the rules will be changed for security purposes, and you'll be outside in a protest pen, along with all the other troublemakers.

Wed, 06/08/2011 - 17:13 | 1352473 El Gato
El Gato's picture

When will ZH investigate and post some information on HRBN?  Citron (www.citronresearch.com) has published two reports on HRBN and they have been spot-on with regards to a few other Chinese fraudcaps, including LFT.

 

HRBN has all the hallmarks of a Chinese fraudcap, including (but not limited to):

1. Frazer Frost as their former accounting firm

2. Since Frazer Frost has been shut down since the RINO fiasco, HRBN now has no accountant

3. The company is a Chinese RTO

4. SEC and SAIC filings do not match

    - $12M in profits in SAIC, $80M in SEC for 2010

    - $125M differences in liabilities

4. Suspiciously high margins on an industrial product (30%+ for motors?)

5. Outdated equipment and an appearance of business at one of their subsidiaries (via the Financial Investigator at: www.vimeo.com/23282580)

6. **BONUS** a new twist in the Chinese fraudcap space, their CEO has even made a non-binding offer to take the company private at $24/share. Several problems with this:

   - The market is treating this offer as a joke. Before what looks like short covering the last few days, that meant the market was offering you 70% upside if the deal went through. Hug red flag

   - The offer has been on the table since October

   - The offer is non-binding

   - The collateral demanded by CDB for the alleged financing treats the shares as worth $7, another huge red flag

   - The Special Committee allegedly weighing the offer is composed of three men, one of whom was on the board of a Chine RTO fraudcap and another who was a director and a board member of penny stocks (again, www.citronresearch.com)

Wed, 06/08/2011 - 18:25 | 1352715 casey13
casey13's picture

http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=UOPN:GR&sid=apE58...

The above article are the finding of the audit committee of Orient Paper a company previously accused of fraud by Muddy Waters and completely exonerated.

Since the alegations the stock price has never recovered so the implications are real and should not be taken lightly.

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwis...

The above is an article on the current allegations by Muddy Waters against Sino Forest.

 

 

 

 

Wed, 06/08/2011 - 19:33 | 1352935 aminorex
aminorex's picture

It's very easy to create FUD about a chinese small cap, but I think Carson Block has bitten off more than he can chew with Sino-Forest. Paulson's hands are not so weak, and Paulson is likely to serve Block his gonads on a plate.  Meanwhile, it's trading for less than the audited cash in the bank in Hong Kong, and I see no reason not to scoop it up.  MICC delisted on the NASDAQ. Eventually nobody will list in North America if they can list in Hong Kong.  If WY could buy TRE, Block couldn't get away with this so easily, but fact is there's no real M&A market in China, so these scares can last a long time, depite a total lack of merit.  Nice work if you can get it.  If I had no morals at all I might start doing "research" on Chinese small caps and marketing my reports to CEOs and funds, in the manner of Block, or the Camorra.

Wed, 06/08/2011 - 21:02 | 1353192 MisterKurtosis
MisterKurtosis's picture

I know how Paulson's investment process works..it's not bulletproof to fraud. He's nevertheless an amazing investor.. that doesn't mean he and his team can't make a mistake or two once in a while. Spending 1-2 weeks analyzing a stock is totally different from having 5-10 people spend two months which is what Muddy Waters did. I know some of the short sellers that do this kind ofwork. It's top notch, so I would be cautious in writing him off on an ad hominem basis.

Case in point: you say it's trading below its audited cash. So what? Its debt is 2x more and Sino Forest has never generated any free cash flow; and this is assuming their numbers are to be trusted.

If you're going to tear apart Muddy and worship Paulson, why don't you do your homework first.

Fri, 06/10/2011 - 19:18 | 1359991 aminorex
aminorex's picture

Paulson is a small vampire squid to me, not a hero, but he's not a weak-hands player.  It is Paulson who will spank Block, not I, as Paulson has a big spanking stick, whereas I  do not.  I make no claims of Paulson's wisdom or diligence, only of his bank account.

Muddy needs to be torn apart because it is an extortion racket.  Dundee and RBS have put the lie to several of Block's claims already, and the 14th will see TSX:TRE report, which will put the lie to much of the rest.

Wed, 06/08/2011 - 21:22 | 1353241 asheylarry
asheylarry's picture

be careful, Casey. The truth doesn't jibe well with this crafted storyline.

Muddy Waters and all these other short sleaze manipulators are as much of a fraud as the companies they gin up complete horseshit "research" on.

Wed, 06/08/2011 - 18:58 | 1352863 Weisbrot
Weisbrot's picture

 

are the Chinese executing those committing the fraud? 

if not then the Chinese government is giving this activity their blessing.

 

 

Wed, 06/08/2011 - 22:51 | 1353466 mcarthur
mcarthur's picture

You also need to keep your eyes out for frauds out of South Africa.  I took pleasure in wiping out one CEO a few years back by feeding some research I did through to a mining analyst who called.

http://www.miningweekly.com/article/froneman-says-dominion-a-solid-asset...

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=CA%3AUUU...

 

The $2b asset writedown barely got any press but it was clearly a fraudulent ore reserve estimation along the lines of Bre-X.

 

 

 

 

Thu, 06/09/2011 - 09:45 | 1354189 aerojet
aerojet's picture

What I don't understand is, how did these frauds get listed on the NASDAQ in the first place?  Could I get my own corporate shell listed there and sell shares, too?  WTF?

Mon, 07/04/2011 - 00:42 | 1423571 Jack Kreuz
Jack Kreuz's picture

The Chinese CEO's will never get arrested and will never go to jail. Even more, Americans will never get their money back by suing the Chinese fraudsters because the Chinese courts will protect the fraudsters. The Chinese State allows misappropriation of private property belonging to foreigners and provides full protection of private property belonging to Chinese. In other words, China allows larceny of foreign property and protects Chinese larcenists.

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