By Glen Bradford
Today I want to help out the business man that has built something out of nothing, who has defeated the odds of mediocrity and through blood, sweat and tears is successfully running a multi-million dollar company that he has grown from infancy. There are Short Sellers out there that are illegally spreading rumors across Chinese Microcaps for their own profit.
Life isn’t fair. If people can screw you and make money, eventually some of them will try it. I operate in the darkest most forbidden corners of Wall Street. I am a bargain hunter for the sport. By definition, an undervalued company is a company that the market hasn’t valued correctly for whatever reason.
I rarely get the opportunity to point out faults anymore, and I want to tell you why just to illustrate that I’m not just a bashing fool. In a nutshell, I grew up as an individual that pointed out what everyone else did wrong and some of them hated me for it. I was an expert in picking out little inconsistencies like typos, missing parenthesis, periods, bad logic. I’ve even been marked down on exams for being overly accurate. Doing so was not effective. The idea is to get people to do what you want to do with the least amount of personal effort. Around the age of 22, I realized that for the most part it was in my best interest to compliment that which others do right and disregard all else. As such, you create positive feedback loops that reward good habits and success. Great success.
So, I wanted to illustrate a couple examples of this and illustrate how criminals can systematically short undervalued companies, do half-assed research, and continue to lie until they decide to cover their shorts and disappear in most cases. I also wanted to talk about ways that companies can combat this as it is fairly easy to deflect but imminently damaging if you don’t combat it head on.
- 1. Oriental Paper (AMEX: ONP) is case 1. Muddy Waters Research, a firm that appeared out of thin air to profit directly from a stock price decline in ONP, visited ONP for 90 minutes and put together a very well spoken piece claiming that Oriental Paper is a scam. The idea was to spread fear. Fear is an emotion that drives action — in this case the action to sell. Oriental Paper responded to all the allegations as promptly as possible: http://finance.yahoo.com/news/Orient-Paper-Further-Responds-prnews-4256390971.html
Then Muddy Waters put out another piece almost immediately continuing to discredit Oriental Papers response, and then within a week they took down all of their “evidence against ONP” and is “moving on.” Effectively vanishing with their illegal profits.
This is likely because if they had left it up, they would be disproven systematically and sued in a court of law. I think they should be! They single handedly destroyed $80M in company valuation.
A few notes you should check out:
http://breakoutperformance.blogspot.com/2010/07/onp-is-doing-all-right-things.html
http://seekingalpha.com/article/219172-orient-paper-and-the-unfortunate-shady-corners-of-wall-street
http://seekingalpha.com/article/220373-taking-another-look-at-orient-paper-s-innocence
- 2. China Biotics is case 2. Andrew Left, on his new website Citron Research asks, “Where are the stores?” That’s the core of the argument that he made against CHBT. China Biotics responded to this threat with a listing of their locations: http://www.chn-biotics.com/c4426/c4435/default.html
Citron then wrote another post discrediting the China Biotics update and continued to try to discredit China Biotics. This is still in action, but Jason Nevader helped write back against the lies: http://seekingalpha.com/article/223055-china-biotics-shorts-found-a-way-to-cover
A few notes you should check out:
http://seekingalpha.com/article/223055-china-biotics-shorts-found-a-way-to-cover
http://china.fixyou.co.uk/2010/07/on-saic-and-sec-filings.html
Alright, the meat of this article:
Once the leaders attack, more people fall in line and start attacking. I don’t believe that this is a coordinated attack, just a group of people that are aware that they can pitch in and help tear apart great companies for a profit and follow the leader to the next company. I could come up with a list of people involved in each case, whether they’re blogging, writing on message boards, submitting their articles to various syndicates, or what not. The point is that it’s not worth my time because these people change.
I’ve tried to develop a general system to illustrate the system that these liars use to rob companies of their market valuations:
The Illegal Short Selling Game Plan
- Wait for weakness in the stock market.
- Wait for some well-known shorter to start making accusations.
- Write an article/research report/blog on a Chinese Stock.
- Point out discrepancy between SAIC and SEC filings.
- Point out that it’s a shell or reverse merger.
- Question the Auditors
- Point out a few stocks that share a similarity that got crushed
- Make a very limited video that neither confirms nor denies any business activity.
- Emphasize relative under performance.
- Link to an article from a website that sounds credible (at least 3).
- Use very biased language and don’t mention any of the positives.
- Wait for the company to come up with a response.
- Attempt to discredit their response.
- At this point in time, other lying short sellers step in and further attempt to discredit the company in question.
- Realize your profits if there are any.
- “On to the next one.”
Why am I doing all of this?
I work for China Growth Partners, where we intend to work with the most undervalued companies in the world to get their story out to investors like ourselves. We are by investors, for investors. We actually invest in the companies we represent. How’s that for accountability?
Mark my words, if you buy CHBT or ONP at these prices, 1 year from now you will have a position with an unrealized profit. As a wise man once said, if a business does well, the stock eventually follows.
You can’t prevent bashers from writing their nasty reports from the beginning.
What can companies do to protect themselves?
- Stock Buybacks.
- Share splits that require shares to be covered and presented to transfer agents.
- Share Dividends.
- Video of operations.
- Pictures of operations.
- Note that sometimes this is not appropriate as it may divulge company secrets.
- Seek legal action against the bashers and their supporters.
- Make an example of the bashers.
- These are just a few ideas. For more ideas I recommend contacting my friend John Lux @ lux.investor@gmail.com
A few potential resources that you may be interested in to learn more about this:
http://stockbasher.com/exposing
Disclosure: Long CHBT, ONP