Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message|
( followers)  

I've been reporting on Longwei Petroleum (LPH)(OTC:LPIH) since the beginning of its brawl with GeoInvesting; a brawl which started earlier this year on the heels of Geo launching what looked like a full-scale, four alarm systematic dismantling of the company; claiming it was a fraudulent operation and singlehandedly causing the stock to drop from over $2 to $0.62 in a single trading day, before the stock was ultimately halted.

I first wrote about Longwei Petroleum right after The GeoInvesting team posted an article here on Seeking Alpha comprised of what appears to be some of the most furious DD this author has ever seen. The initial GeoInvesting article states:

Longwei is reportedly engaged in the wholesale distribution of finished petroleum products in the People's Republic of China (the "PRC"). LPH's headquarters are located in Taiyuan, Shanxi Province, adjacent to and overlooking its Taiyuan fuel storage facility. LPH has a reported fuel storage capacity of 220,000 metric tons located at three storage facilities within Shanxi: Taiyuan, Gujiao and Huajie, which it claims have individual storage capacities of approximately 50,000 metric tons ("mt"), 70,000mt, and 100,000mt, respectively.

Unfortunately for owners of LPH stock, we have determined that the company's purported business operations are massively overstated and a brazen fraud, on an order of magnitude unmatched before by any China-based companies we have seen. Furthermore, we have no faith in LPH's auditor, Anderson Bradshaw. This is because the firm's head of quality control, Russell Anderson, was the audit partner of YUII while he worked at Child, Van, Wagoner & Bradshaw. Russell failed to detect the massive YUII fraud we uncovered and did not resign until the YUII Chairman admitted fraud 5 days after we exposed them. Our exposé led to YUII's delisting. LPH stock in our opinion is virtually worthless, completely un-investable and should be immediately delisted by the New York Stock Exchange ("NYSE"). We are sending all of our evidence to the NYSE and other securities regulators, just as we have done in prior cases.

The purpose of my article is to continue my analysis of the situation, as well as disseminate how things have played out since my last article.

The Past Timeline of Events

December 3, 2012 - Longwei hits an all-time high of $2.85/share.

January 3, 2013 - GeoInvesting releases its initial article, systematically dismantling LPH from the inside out. LPH subsequently halted at $0.62/share.

January 11, 2013 - Longwei releases its own copy of security video, that I comment on in my first article:

Emerging from their seven day silence, with their King Solomon-like first-response to the real first response, Longwei released yesterday what they claim to be their security videos of the same area that GeoInvesting claims to have had cameras on, and -- guess what -- it shows a completely different number of tankers in and around the area at the time in question. Both of these videos, provided by Longwei, show workers in and around tankers pulling up to a docking station. They show workers pointing to things in the docking station, milling around the tankers while they're stopped, and sticking the tankers to take measurements.

January 17, 2013 - My first article, pondering which of these two parties has been brazenly disingenuous, is published.

January 11-19th - Class action lawyers smell blood and start to fire off multiple PRs fishing for investors that lost significant amounts of money in LPH.

January 30th, 2013 - GeoInvesting releases another article with China Central Television investigating the action at the Longwei plant. The results it finds align with the fraud claims put forth by The Geo Team. The video includes it touring the facility, noting the growth of weeds on Longwei's rail spur, and speaking with locals who claim they don't see much going on on-site.

February 1, 2013 - LPH files Form 8-K announcing two Board of Directors resigning.

February 26, 2013 - The company receives a non-compliance notice from NYSE and continues to half-assedly defend itself by saying:

As previously stated, Longwei believes the Geo Investing report dated January 3, 2013 contains numerous errors of facts, misleading speculations and malicious interpretations of events. Nevertheless, in order to provide the highest level of transparency to its shareholders, the Company and its legal counsel in the U.S. and the PRC, as well as its auditor are reviewing the allegations and management is cooperating with the review process. The Company intends to take further action to defend itself.

March 11, 2013 - Longwei PR announcing a delist from NYSE with the same defense as listed above.

Subsequent Events

March 20, 2013 - An interesting curiosity pops up on Longwei Petroleum's site under its "quick links" in Investor Relations. When you click the link you are taken to a copy of a lawsuit, available here, filed on 19 March 2013.

The suit is Longwei Petroleum vs. Jon Carnes, GeoInvesting, and Seeking Alpha; along with Joe Doe defendants 1-10. The suit alleges "defamation, fraud, and RICO violations" against the defendants and alleges that the Geo-Carnes enterprise (defined as Jon R. Carnes and GeoInvesting collectively) essentially worked in tandem to profit off of short selling that was executed pre-article release. I pointed out that theory, called "short & distort", in my first Longwei article:

The week that followed has resulted in a war between current Longwei supporters, believers, shareholders and the company versus GeoInvesting -- either seen to be a shorting group with an agenda or a group hell-bent on furious due diligence in support of the common investor.

One thing is for sure; one of the two of these parties is not only dead wrong, but disingenuous on a scale that makes grand theft larceny look like stealing a Post-It note from the office. Longwei supporters claim the short position by GeoInvesting led to a mountain of false due diligence and a hit piece. People reading the GeoInvesting article for the first time are convinced Longwei falls under the umbrella of other China-based companies poised to try and make money for their insiders on the US Markets.

The suit identifies GeoInvesting as a business in Skippack, PA and claims it to be the bad guy, shorting Longwei's stock and creating a campaign of misinformation to profit off of it. Seeking Alpha is named in the complaint for e-mailing the article "to approximately 272,000 individuals". The complaint says "the Geo-Carnes Enterprise is engaged in an ongoing fraudulent scheme to willfully defame public companies, manipulate their stock prices, and rampantly short these companies' stocks to obtain massive profits."

The complaint links the Geo-Carnes enterprise to "Alfred Little", another site questioned for its motives in "uncovering fraud". It points out a Bloomberg article where Carnes admits to shorting stocks that he published reports about.

The complaint states that since the Geo report only used three days of video footage and allegedly sent the other 46 days of footage to the SEC, that it did not properly prove its point. Longwei again cites its own videos from December 9th and 11th of 2012, which Longwei claims shows 22 trucks fueling at its Taiyuan Facility.

Longwei's suit cites what appears to be several grossly false points made by the Geo team; most of which deal with the amount of tanker traffic that has been through its separate facilities. Longwei contests that there has been significantly more traffic than the initial Geo report provided.

Longwei's suit claims that Geo's claim of Longwei overstating sales by more than "800 times" is an archaic and simple extrapolation that has been done incorrectly to purposefully defame. The suit then goes on to show the subsequent 84% price decline and $242 million loss in Longwei's market cap.

The complaint goes on to link Jon Carnes as the "primary author" behind the entire original Geo report.

The 61 page complaint wraps up by asking for:

i) An award of compensatory money damages in an amount to be determined at trial;

ii) An award of punitive damages in an amount to be determined at trial;

iii) An award of treble damages in an amount to be determined at trial;

iv) A disgorgement of all profit made in connection with shorting pre-publishing

...and other numerous orders dealing with removing the content from websites and permanently preventing such items to hit the web in the future. The original report is attached as "Exhibit A".

So, again, we have two entities, each claiming each other is fraudulent. As I said in my first article:

At the end of the day, we have two videos from two different parties claiming to be from the same date and time, showing two different sets of events unfolding. How does one go about explaining that? Moving forward, the answers will come. Logic dictates that there's something out of the ordinary going on here, but only time will untwist the pretzel that has become the truth behind Longwei Petroleum.

Conclusion

Longwei last traded on Friday at $0.13 on the Grey Market. It opened at $0.12 first thing this morning. For investors that purchased Longwei last year, it's been almost a total loss.

Grey market securities are as risky as you can get in the investing world and I absolutely do not advocate purchasing them for any reason, aside from pre-IPO. Conversely, there's an extremely small and extremely risky possibility of making serious cash if Longwei can prove that its numbers are legitimate. If the company is performing any type of 3rd party audit in the background of things and can prove half the production it claims, this stock could be a 10-bagger. It's situations like this where sometimes the bold are rewarded. Having said that, again, it's EXTREMELY important to note that a purchase here has a risk of TOTAL loss.

Only the extremely speculative would consider a buy here, and it'd have to be with money they'd be perfectly fine with losing.

As for me, I'll continue to do what I've been doing: sit on the sidelines, watch, and report. As time goes on, we're going to find out exactly which one of these two parties is doing the defrauding. I wish everyone, especially those who lost major money, the best of luck in the future as the Longwei story continues to unfold.

Source: Longwei Petroleum Vs. GeoInvesting: Someone's Wrong