Tag Archives: caveat emptor

A Chinese Reverse Merger “Fraud” CEO Speaks

13 Jul

Among the almost countless reasons investors should be wary of investing in taste of the moment or “hot” Chinese stocks, we may now have solid confirmation of a new one: a complete and utter lack of personal responsibility/accountability of/by those running these firms.  This flies in the face of the many critics and short sellers who loudly proclaim the majority of these firms are merely examples of management getting rich while the shareholders get poor.

In an article translated into English, “The president of a delisted high-tech firm in northern China, who prefers to remain anonymous, has shared his views of the whole process of being listed and delisted.  The president claims his company was dragged into the listing process and naively trusted a host of exploitative government officials, bankers, and auditors, only to be torn apart later.”

As far as I can tell, the anonymous executive is none other than Mr. Zou Dejun, CEO of alleged fraud Rino International, at least from similarities mentioned in the article to RINO’s regulatory filings.
Remember, this is the firm whose auditors (questionable firm, Fraser Frost) resigned for lack of reliance in mangement’s representations, and whose stock was de-listed by the NASDAQ in April.

I have not followed RINO’s plight in enough detail to comment on the fraud allegations and/or “proof” offered-up by the likes of Muddy Waters, however, from this executive’s account, there is a far more fundamental concern.  The executive assigns blame for his firm’s misfortunes to literally everyone except himself: auditors, investor relations firms, China and US-based “capital markets” firms, Chinese politicians, his own employees, really everyone EXCEPT himself.

To be sure, a reluctant CEO unprepared and uneducated in matters that come with the title is an unenviable position in which to find one’s self, but there are numerous and extraordinarily simple ways of dealing, for instance, resigning, or better, doing your job and putting your foot down when outsiders try to tell you how to run your firm.  I don’t buy for a second that cultural issues such as pride and honor are acceptable reasons for failure to do so.  This is true in every country – sure to varying degrees – but no CEO anywhere on the planet wants to admit he needs help or can’t handle the task with which he is faced.  Nor do I buy that this executive was so painfully naive and so disconnected from the circles of professional businessmen that he lacked the wherewithal to see what was happening, nay, to see what he was signing-off on.  His sole tangential admission of blame is in saying “if I had to do it all over again, I would have done it differently.”  Great, I’m sure all the shareholders who relied on you to look out for their best interests feel much better now.

This is the job of  CEO, to be able to politely dismiss the interests of others which are not necessarily in the interest of the firm and its stakeholders.  To say to the politician, we absolutely plan on going public, but only when we are ready to show the World how great our firm and our Country are, to say to the lawyers, bankers, and brokers and high-priced auditors thanks, but no thanks.  To allow all of these people to dictate to you – the CEO – what the company is going to do is cowardice.  Man up and do your god damn job.  And if you don’t feel like stepping up, don’t run your mouth and complain about it when the only person you really have to blame is yourself.

The experiences of this executive are hardly unique to China (how many failed executives in the U.S. blame “the markets” or some other outside force for their shortcomings?), however especially in the reverse merger space, I would not be surprised if they are relatively wide-spread and shared by a great many of his peers.  Again, in this executives defense (assuming he is who I believe he is), the risk factors were largely stated in regulatory filings.  I doubt anyone except the lawyers who drafted them actually read that far, though.

As I’ve said dozens if not hundreds of times at this point:

CAVEAT EMPTOR

Those Who Fail to Learn From History, Part 729,842: YOKU

13 May

Another Chinese “advertising” company with U.S.-listed shares.  Gee, where have we seen this movie before…

Remember China MediaExpress Holdings?  CCME?  I’ve written at great, great length about the firm and the many, many red flags present in its regulatory filings going back to 2009, but one of the most telling, most glaringly obvious signs of possible trouble was the corporate structure, which I wrote about (among other places) here:

Compare this to YOKU’s, from Page 5 (FIVE!!!!) of their F-1 ADR registration statement:

In both cases, the PRC “operating” companies are controlled entirely by corporate insiders (and their families).  The only recourse the holding-company (and thereby shareholders) has (have) over the operating companies, their assets, and cash flows are spelled-out in “contractual obligations,” spelled-out in very-little detail on pages 5 and 6 of Yoku’s F-1  If corporate insiders and their families loot the bank accounts of the PRC entities, U.S. shareholders will very-likely end up with little, if anything, to show for their “investment.”

The filing does go into a bit more detail on these “contractual arrangments” and the risks thereof, specifically, on pages 30/31 (emphasis mine):

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A Wolf In Sheep’s Clothing

18 Apr Wolf-in-Sheeps-Clothing

Much has been written about Goldman and the Timberwolf deals since the now infamous “shitty deal” showdown between Senator Levin and GS officials last fall. In reading the majority/minority report issued last week in its entirety, there’s a few things that really stuck out to me. Continue reading

On The Upcoming Glencore IPO: Is The Juice Worth The Squeeze?

17 Apr

Glencore is the most powerful, connected commodities trading firm on the planet.  Since many valuable commodities are located in politically unstable parts of the world, earning, and more importantly retaining that honor necessitates that Glencore engage in some possibly questionable business practices, some (many?) of which might just happen to violate one or more international laws or sanctions.  Running such operations as a private, closely-held firm based in a quiet corner of Switzerland is hard enough, but doing so as a soon-to-be publicly-traded company in both London and Hong Kong may provide near impossible given the much higher visibility and scrutiny that comes with a public listing.

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Muddy Waters’ Founder Carson Block On Investing In Chinese Reverse Mergers: CNBC Interview

12 Apr

Herb Greenberg got the chance to sit down with Carson Block, Founder of research firm Muddy Waters today to talk about investing in Chinese stocks, especially RTO (reverse-merger) situations.

http://plus.cnbc.com/rssvideosearch/action/player/id/3000016286/code/cnbcplayershare

I think he brought up a term seldom heard in the financial media – Potemkin Factory – and went on to explain some very basic tenants of due diligence apparently ignored by many investors Who Should Know Better.

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China MediaExpress Holdings: Excuse My Continued Lack of Shock

17 Mar

When you – in this case, CV Starr and affiliated funds – buy a large chunk of a Chinese Reverse Merger company, like, oh, I dunno, China MediaExpress Holdings, and you get a board seat, perhaps you should insist your “man on the ground” is on the Audit, not Compensation committee.  And perhaps you should do a little more independent due diligence, instead of meeting management and reviewing documents they supply.    Just sayin…

Otherwise, don’t be surprised when your Auditor and CFO resign, and your board member steps down citing “in particular, irregularities in the bank account balances of CCME’s PRC subsidiaries.

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Caveat Emptor, Part 7,931

16 Feb

For the past few months, Long Island, NY-based David Lerner Associates has been advertising on CNBC with some pretty aggressive claims and customer testimonials.  Were I not of the cynical, skeptical variety, I could see myself being quite intrigued by the commercials, which portray customers heaping nothing short of the highest praise for the investment performance and service they’ve received from Lerner.  Now, EVERY broker/dealer gets fined and subject to arbitration for Regulatory violations, customer complaints, etc, that’s just the nature of the business, but that’s another conversation for another time.  Let’s use DLA as an example for how retail investors can and should protect themselves:

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