A Definitive Guide to Chinese RTO Pumping and Dumping

by: Harry Beck

I believe that there are honest Chinese-based firms trading on USA exchanges. Regardless, the amount of pumping going into the Chinese RTO equities is as staggering as the recent downfall of many of the same stocks.

Below is a humorous guide that categorizes the pumping posts I've seen on various message boards. Examples of pumper comments are in italics and my own “knee-jerk” thoughts are placed in parentheses.

  1. There are "cultural differences" that explain why the numbers don't match! (This is true if the "culture" consists of getting away with fraud at the expense of USA investors.)
  2. The numbers have to be real because the auditor had an unqualified opinion! (Auditors always issue unqualified opinion before they perform the last audit and resign. Usually this happens soon after the auditor receives a public or anonymous letter detailing serious accounting issues that the auditor previously ignored.)
  3. Differences between SAIC and GAAP can be explained by how the Chinese conduct business! (Bull. Keeping multiple sets of book is a definition of fraud in any culture.)
  4. The cash on the balance sheet is real! (The cash is not real if it is now in an offshore bank account.)
  5. There is no way the insiders can sell without registering first! (Insiders are not going to register about engaging in a fraud before they commit it.)
  6. The company has “x” contracts for orders! (Those phony contracts are no different than the scams in this country.)
  7. There is no way the bank supplying the funds for a share repurchase or buyout can be corrupt! (Hey, in China corrupt bankers are a fact of life.)
  8. Look at all the option activity in the calls! (Yeah, the shorts are writing the ITM calls and not buying them.)
  9. There is going to be a short squeeze! (The shorts may sneeze if they have allergies, but they aren't ever going to get squeezed in a known fraud stock because the last ones holding it will get out at $0.00.)
  10. During the trading halt some bozo will still say, "There is going to be a squeeze when they start trading it again." (See #9.)
  11. Citron Research (or Muddy Waters/ Bronte, etc.) is a fraud! (Citron has a better track record than any short seller I've ever been aware of. Andrew Left has never been wrong with a fraud call. Never, ever. Really.)
  12. If you ask for your shares there won't be any available to short! (Yeah, and you threw a ball out the window of your girlfriend's apartment and the dog jumped over the balcony chasing it. That is another urban myth. The twenty-something longs posting here can take all their $1,000 orders, ask for their stock and the effect will be zip.)
  13. I have information from calling a director that _____________! (Yeah, like any insider will talk to you.)
  14. I called IR in China and the person said ____________! (Yeah, like any of these fraud companies will talk to you. There is a guy near the corner liquor store who regularly talks with God, and he is more credible.)
  15. The SEC will stop trading the stock if there is an inkling of fraud! (First of all, NASDAQ will stop the trading. The SEC couldn't protect investors with the big frauds like ENRON, Bre-X, the old Conseco, Tyco, Worldcom, etc. Don’t expect the USA regulators to get involved until it is too late.)
  16. Shorts cannot make money because it is too expensive to short! (Shorts are selling ITM calls, and lots of them. Those with chutzpah buy puts despite the premiums when they think a delisting is near. Use a major wirehouse and the carrying cost to short is reasonable.)
  17. Customer names are a trade secret and not disclosed! (That is because the customers don't exist!)
  18. There is a good reason why the company borrowed money and never used it! (Is the cash already offshore?)
  19. These are real pictures of the company HQ and factory! (Where are the employees? Why is there no name on the building? Why does the building shown have a greater estimated value than the asset listed on the balance sheet?)
  20. The company hired "x" number of employees! (OK, where are photos of any of them wearing company logos on their uniforms? Where are all the photos of these employees playing softball games, enjoying company picnics, or hard at work? They do have cameras in China, don’t they?)
  21. The company delivered "X" amount of inventory for the quarter! (OK, if that is the case why can't I find a single photo of a company truck? Why can't I find photos of boxes of the inventory with the company logo stamped on each box?)
  22. The shorts are gonna get burned today. They will all burn in hell! (The shorts will be far wealthier arriving to either heaven or hell than the suckers who own the Chinese RTO fraud stocks! If I were a man of the cloth, I could guarantee were all the pumpers are going!)
  23. Goldman Sachs and other Wall Street firms are part of this deal! (Are these firms acting as bankers or advisors? Paying a Wall Street firm a couple of bucks to advise a “special committee” for an hour or two is not the same as hiring the firm as a banker. Putting out a press release as if the deal is real doesn’t pass my smell test!)

I hope Seeking Alpha readers found the above list humorous. Perhaps naïve investors will also find the list educational. Someday the quality Chinese stocks--and there are some--will have their day in the sunshine. Before they do, I hope to publish a corollary to the above list and start going long. For now, I’ll remain skeptical of any Chinese RTO.

Disclosure: There are no stocks listed in the above humorous article. The author is currently short OTC:CHBT and has plans to institute other Chinese RTO short sales within 72 hours.