China Agritech: Questioning Management's Credibility (Part 2)

Oct. 6.10 | About: China Agritech, (CAGC)

In Part 1 of this article, I examined how China Agritech’s (OTCPK:CAGC) CFO Yau Sing (Gareth) Tang personally pocketed 7-figures by illegally selling unregistered shares while shareholders suffered complete equity loss in the now defunct China Cable & Communication Inc. [CCCI.PK]. In Part 2 of the article I will examine Mr. Tang’s involvement in a similar scheme that took place in the late 1990’s in Hong Kong.

Once Upon a Time in Hong Kong: The Story of Prosper eVision Ltd.

Something which is not mentioned in the biography of Mr. Tang that CAGC furnishes in their 10-Ks is his involvement in another defunct company named Prosper eVision Ltd. (formerly 0979.hk). To find out about Prosper eVision, you need to look at the 10-Ks of CCCI where Mr. Tang’s biography mentions that he was the CEO prior to his association with CCCI. But the story of Prosper eVision begins even earlier in the late 90’s with a company called China Prosperity Holdings. What happened with China Prosperity Holdings bears striking resemblance to the CCCI fraud.

The following italicized excerpts are cited from the article “Beyond Social Capital: Triad Organized Crime in Hong Kong and China” by T. Wing Lo, as featured in volume 50, issue 5, pp. 851-872 of the British Journal of Criminology. This tells the full story of Yau Sing Tang's involvement in the China Prosperity Holdings pump and dump scheme. I am providing an abridged version, but it is available in full here for a cost of $25. All CAGC investors should buy this article, because $25 is likely insignificant placed next to their investment in CAGC.

The Setup (April-August 1999)

In 1999, CAGC's current CFO Yau Sing Tang joined forces with a Triad boss Jimmy Heung and his company Win's Prosperity Group to manipulate the price of a Hong Kong listed company China Prosperity Holdings ("CPH") during the the time period April-October 1999. Mr. Heung and Mr. Tang were there only directors of Win's Prosperity Group. Mr. Tang was also the Executive Director of China Prosperity Holdings, but because of his Triad ties, Mr. Heung was unable to serve in a directorship capacity of that company.

On April 29, a publicly listed company OLS group was renamed to China Prosperity Holdings. Because at the time CPH had negligible operations, the masterminds accumulated shares at a very low price, mostly below $1 HKD (at the time $1 USD = $7.8 HKD). This took place between April and August 1999. They also used their positions as majority shareholders and controllers of the board of directors to issue themselves 14 million stock options at $0.16 HKD. After they had their options in place and had accumulated millions of CPH shares, the masterminds then went about their plan of manipulating the stock via leaking rumours about a promising media venture that CPH was to take part in on the mainland.

The Pump (September 1999)

A rumour about CPH was leaked out to selected mass media, which drew the attention of ‘smart guys’ to buy the company’s shares ahead of other investors. The rumour was about CPH’s entering into a conditional agreement to acquire a 33 per cent indirect stake in Jimmy’s Win’s Prosperity Group, which was to develop a Century Vision Network (“CVN”) project that would capture 200,000 subscribers in the first year of operation and 100 million subscribers within ten years in China. There was also a rumour that CPH would enter into a joint venture with a state-owned enterprise in China. The rumour also said CPH would invest about HK$780 million in this project, but we discovered that the company’s unaudited result for the six months ending 30 June 1999 was only a turnover of HK$60.50 million (CPH company announcement on 9 October 1999). As the rumour spread, the ‘smart guys’ who got the ‘privileged’ information bought up the shares speedily and, consequently, the price soared in a short period of time, drawing more share hunters to buy in amid its profitable investments.

From September 2 to 24, 1999, the Hang Seng Index fell by 3 per cent, however Yau Sing Tang's company CPH increased by 238 per cent by September 24.

Directors Exercise Millions of Options (September 24 1999)

As the public ate up the prospect of the potential for the first media joint venture on the Chinese mainland, CPH's directors took advantage of the rising stock price, exercising their options. On September 24, the directors exercised their 14 million options at $0.16 HKD. Of the 14 million new shares, Yau Sing Tang, personally held 10 million shares, representing tens of millions of HKD based on CPH's closing price on September 24.

Trading in CPH's shares are suspended pending a company announcement (25 September to 9 October 1999)

In Hong Kong, a company leaking share-price-sensitive information or having unusual trading activities may be requested to suspend its share trading. On 9 October 1999, the Hong Kong Stock Exchange warned that the Exchange was concerned about companies that were leaking information to certain news media instead of making public announcements so as to increase investor enthusiasm for their shares. These companies should release the information necessary to enable investors to appraise them in order to avoid the establishment of a false market. In Hong Kong, if the leaked information is inconsistent with what is announced formally later, the acts may be in breach of the Securities Ordinance. CPH was requested by the Stock Exchange to suspend trading on 25 September 1999. On 9 October 1999, CPH was forced to make a public announcement, mentioning a joint venture, through Jimmy’s Win’s Prosperity Group, with China’s Telecommunications Bureau and State Administration of Radio, Film and Television ("SARFT"). It said the Win’s Prosperity Group had entered into a non-binding agreement to operate the venture with the Telecommunications Bureau, a SARFT subsidiary and other unnamed partners. Under the agreement, Win’s Prosperity Group would hold 33 per cent of the venture, while the Telecommunications Bureau—which controls China Telecom—and the SARFT subsidiary each would have 10 per cent interests. CPH said a final agreement was expected to be reached by the end of October.

The following is part of the public announcement:

The CVN Project is in the development stage and may or may not materialise. WPGL [the Win’s Prosperity Group] has entered into two Letters of Intent for the purpose of launching the CVN Project in the People’s Republic of China (PRC). It is unclear if the structure will be changed or not. In addition, WPGL may or may not enter into formal agreements with the PRC telecom partner to arrange for the use of the telephone networks or with the PRC broadcast partner to obtain the approvals for the content to be broadcasted by CVN via the telephone networks in the PRC. As the Letters of Intent entered into are non-binding and commercial negotiations are still being conducted and are not finalised, it is possible that the structure set out in the Letters of Intent could be changed. It is also uncertain whether a formal agreement will finally be reached. If no formal agreement is reached, the CVN Project may not be launched in the PRC.

(CPH company announcement on 9 October 1999)

Analysis of the announcement reveals that it shares characteristics with CCCI's own Macau Media transaction. Win’s Prosperity Group had signed two non-binding agreements with a Chinese telecommunications company. As in the case with Macau Media, since these were non-binding agreements, the deal could disappear suddenly without any real cause.

The Dump (October 1999)

With the share price of CPH already trading at a high level due to the previous leaking of information, the company pushed it further via the public announcement on the possibility of a very promising venture, the first joint venture with a Chinese state-owned media company. However, the truth of the announcement, could not immediately be verified by securities authorities; This didn’t matter too much the public who only saw the potential, not the risks. The announcement triggered panic buying by the general public and CPH's trading volume soared. This provided Mr. Tang and his associates with an opportunity to sell their accumulated shares. When CPH resumed trading on 11 October 1999 after the announcement, its share price jumped 32.02 per cent to $5.05 from its previous close on 24 September. The next day, 12 October 1999, CPH slid 11.38 per cent to $4.475 in extremely heavy trading and on no news, suggesting that some insiders or those with insider information were actively selling the shares.

When the share price of a company is in a panic-buying or selling stage, the government’s watchdog will step in and request the issue to be clarified. The Securities and Futures Commission of Hong Kong challenged the $20 billion valuation of the joint venture as too high, and pointed out that such a venture would not be able to circumvent China’s restrictions on communications investment by foreign companies. The Commission also warned the public through the mass media: Unequal dissemination of price-sensitive information could lead to insider dealing and the possible formation of a false or misinformed market for these shares . . .. Large changes in prices or turnover may also indicate that there is a false or misinformed market . . . [and the] public may be at risk and suffer loss because they can only trade on the basis of incorrect or incomplete information. (South China Morning Post 1999:1). The watchdog contacted the mainland Chinese partner to verify the status of the proposed venture because CPH had refused to provide information about the progress of negotiations. Five days after the company announcement, on 14 October 1999, CPH suddenly announced that the mainland joint venture was aborted…With the excuse of commercial secrets, CPH declined to disclose the reasons behind the termination…

After the announcement that the venture was aborted, CPH shares plummeted 31.84 per cent on the first trading day, 26.22 per cent on the second day and another 12.88 per cent on the third day. Half a year later, on 5 June 2000, China Prosperity Holdings changed its name to Prosper eVision Limited. Yau Sing Tang remained at the helm of Prosper eVision and in its brief flirtation with existence it appears that additional questionable trading activities took place.

http://www.sfc.hk/sfcPressRelease/EN/sfcOpenDocServlet?docno=02PR79

http://www.sfc.hk/sfcPressRelease/EN/sfcOpenDocServlet?docno=02PR1

In Part 1 of the article I said that the companies Best Fortune Capital and China Convergent Corp., which were associated with CCCI would surface again and this is where they do. It seems as though both Mr. Tang and his associates duplicated many aspects of their activities in Hong Kong in the US as well.

To summarize: China Agritech’s CFO has been involved in at least two separate Pump and Dump stock schemes in Hong Kong and the US. In his US dealings he additionally violated securities law via the sale of over $1 million worth of unregistered stock. All this information is public, if investors are willing to look for it. I have provided all of the necessary URLs to confirm everything that is being alleged in this paper.

What does this mean for CAGC?

If after evaluating his past behaviour one arrives at the conclusion that CAGC’s CFO is a dubious figure, then looking at CAGC’s financial statements, a lot of red flags become more troubling: consistently negative operating cash flows, even though CAGC has supposedly always been profitable; huge accounts receivable balances; extremely high returns on fixed assets.

CAGC’s stated plan to build and operate approximately 10 and 45 branded large-scale distribution centres in central and eastern provinces in 2010 and 2011, respectively, at a cost of approximately $1 million each looks like it has the potential for management abuse. As these centres would likely be placed in out-of-the-way and/or rural locations it is unlikely that most investors or auditors would have the capability do the proper due diligence confirming both the existence and true cost of such centres. An unscrupulous management team can use transactions such as these to siphon money away from the public company and into the hands of cronies, via inflated billing of land and goods. Investors should keep in mind, it has already established that CAGC management is siphoning money away from the public company and into the hands of insiders via significantly above-market price related-party leases.

This recent prospectus summarizes shares under insider sales to be registered. It indicates 366K shares to be sold by 5 separate insiders, including CEO Yu Chang. At the date the prospectus was filed, April 27, CAGC closed at $18.43 per share. Multiply by shares being sold by insiders and you come up with a nominal value of $6.75 million dollars worth of stock sales by insiders.

Every past corporate entity for which CAGC’s CFO Yau Sing (Gareth) Tang has been a signing officer has been an unmitigated disaster for ordinary investors and extremely lucrative for Mr. Tang. Considering his history, it is astounding that he has somehow remained able to serve in the capacity of CFO and controller for a publicly listed entity.

CAGC’s CEO Yu Chang, as the majority stockholder and Chairman of Board for China Agritech, largely has discretion over who is chosen as CFO of the company. The fact that he has chosen Mr. Yau Sing Tang shows that he is, at best, careless and woefully negligent in his fiduciary duty to shareholders and at worst potentially complicit in a similar scheme to those discussed.

Disclosure: Short CAGC