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  • Should Orient Paper to Restate Its SEC Filings and Disavow Its Press Releases and Websites? 6 comments
    Aug 6, 2010 6:19 AM | about stocks: ONP
    Orient Paper Inc. is a small paper manufacturer in China that trades on Amex. It has been accused from a number of sources of embezzlement by management and falsification of its financial statements. The newest members of the board of directors, who make up the audit committee, have taken the step of hiring a law firm, Loeb & Loeb, to investigate and have hired the financial advisory services of Deloitte and Touche to assist in dealing with the allegations.
    This article questions whether Orient Paper should immediately announce that it SEC filings should not be relied on, and whether it should state that neither should its press releases or website(s) be relied on. Why? Orient Paper’s SEC filings have numerous internal inconsistencies, and externally inconsistent with its press releases and website(s). In this article I detail some of these inconsistencies. These will be in addition to the problems I detailed in my original article, “Orient Paper, Does It Add Up?”, where I described Orient Paper’s false representations that it had a R&D facility and a 37 member R&D Team and the dubiousness of its claimed growth in light of its reported reduction in employees and  its lack of spending on advertising and promotion.
    In this article, I detail Orient Paper’s misstatements about its leases, its misstatements and failed promises regarding its business plans and operations, and it’s inconsistencies concerning the supplying of its raw materials. Some of the representations support the claim that Orient Paper is contracting, not growing as it claims.       
    Orient Paper’s Mistatements About Its Leases
    Orient Paper “alleged” non-cancellable lease of 133,200 acres simply disappears from its financial statements after it last appears on its 2nd quarterly report in 2008. Orient Paper had claimed that it paid an annual fee of $15,384 for this non-cancellable lease that expired in 2031. The lease just disappears off the financial reports with no explanation given. Further, as the only other lease Orient Paper reports was related to the 42.95 acres, the disappearance of this lease indicates that Orient Paper is contracting, not expanding as it claims. 
    Orient Paper makes inconsistent reports about 42.95 acres, comprised of two districts. Orient Paper originally reported in its 2007 annual report that it leased this property for$15,384 in a 30 year lease expiring in 2031. In its 2008 annual report, Orient Paper contradicts the earlier report, stating that it obtained in 2003 land use rights in the property for 50 years for the price of  $2,189,328. In the same report, Orient Paper also claimed that it leased only the 32.95 acres in the 2nd district, contrary to its previous representation that it leased the entire 42.95 acres.
    Clearly, Orient Paper’s representations regarding the the 2nd district of the 42.95 acres contradict each other. Orient Paper could not have been leasing this property in 2007, as it claimed then, if it had purchased the land use rights in 2003, as it claims now.
    Orient Paper’s Misrepresentations About Its Plans
    In 2008, Orient Paper Inc. reported that they were building a 2 million square metre facility with a production capacity of $1.2 million tons and that by 2010 they expected revenue of $800 million to $1.3 billion and net income of $160,000 million to $230,000 million. The building of this facility never materialized. It appears that Orient Paper never had the funds, resources, or capability to build this facility. This appears to be a clear fabrication.
    A similar claim was recently resurrected in a promotional video done by a promoter of the stock, Doug from, where the CEO of Orient Paper showed Doug a plan to build a 1000 acre facility. Orient Paper does not have the funds, resources, or capability to build this plant. There are no disclosures in its SEC filings on this facility and nothing presented as to what it would cost, what it would produce, or when it would be completed. 
    In 2008, Orient Paper issued another press release claiming that it was converting to an anti-counterfeit paper production line which would produce a minimum of 10,000 annually in its first year and which would generate $40 million in revenues and $6 million in profits.. See link at Again, Orient Paper never delivered on this promise, it is not producing or selling anti-counterfeit paper according to its SEC filings since.
    Orient Paper’s Questionable Representations Regarding Obtaining Raw Materials:
    Orient Paper has made contradictory representations about its raw materials, claiming in press releases that it was attempting to address raw material supply problems due to a shortage of domestic supply while claiming in its SEC filings that it had no problems obtaining raw materials due to long term, stable relationships with local suppliers. One of the difficulties for Chinese paper manufacturers is that they need to import the raw materials, wood pulp and waste paper, needed for the production of paper, as China lacks sufficient domestic resources. Orient Paper recognized this difficult in press releases and claimed various steps to address this problem, none of which materialized.    
    Orient Paper claimed that it obtained a permit to import 170,000 tons of waste paper to alleviate the lack of domestic supply and would be selling the waste paper to other mills, including 34 other local paper mills. However, Orient Paper never imported waste paper or sold it. See link at
    Orient Paper claimed that it signed a letter of intent to merge with a company that supplied raw material and made paper, Lingzian Taihua Pulp & Paper Ltd., Co., to obtain the vertical advantage of having its own raw material supplier and obtain economies of scale. This merger never happened. See line at;col1.
    In 2008, Orient Paper issued another press release claiming it signed a letter of intent to merge with another company that had projects that would enable it to supply raw materials. This merger never happened.   See link at
    Appearing to contradict these press releases, Orient Paper claims in its SEC filings to have the advantage of having all its supply needs met at favorable prices due to a stable, long term relationship with local suppliers. This claim is dubious given Orient Paper’s recognition of and claimed attempts to resolve the lack of supply in China resulting in intense competition for these raw materials and the necessity for importing the majority of them. 
    Inconsistent Representions About the Types of Paper It Produces
    Orient Paper is also repeatedly inconsistent in its SEC filings regarding the types of paper that it makes. For example, Orient Paper claims in 2007 and 2008 that it produces and makes digital photo paper and security paper. However, Orient Paper makes clear in a later filing that it only started producing digital photo paper in 2010 and that it does not make security paper, but intends to develop it.
    Orient Paper’s representations about the types of paper it manufactures is also inconsistent with its claims of increasing the types of papers it produces and raises doubts about the growth it claims. In its 2007 annual report and in its 2008 quarterly reports, Orient Paper stated that it engaged in the production and distribution of copy paper, uncoated and coated paper, digital photo paper, corrugated paper, plastic paper, kraft paper, graphic design paper, antifraud thermal security paper and other paper and packaging related products. In its 2009 annual report, Oirent Paper is done to identifying only 3 types of paper that it manufactures – corrugating medium paper, offset printing paper, and writing paper.
    This list of inconsistencies with Orient Paper’s SEC filings is not intended to be exhaustive. However, it is indicative that Orient Paper’s representations are not accurate and it is evidence that Orient Paper is acting fraudulently. Furthermore, it casts doubt on the competency of management to run anywhere near the kind of operations they claim. Perhaps, Orient Paper should address these problems by stating that its SEC filings should not be relied on and neither should its press releases or websites be relied on.    

    Disclosure: No current position. Was long prior to Muddy Waters report. Then went short. Now have no position.
    Stocks: ONP
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Comments (6)
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  • apolo_11
    , contributor
    Comments (33) | Send Message
    yep - tough year 2008.


    what about C, GM or AIG? know how many press releases they had prior to 2008 that didnt lead to anything?


    this is interesting but unrelated to a massive revenue fraud.
    9 Aug 2010, 04:40 AM Reply Like
  • CSMhater
    , contributor
    Comments (388) | Send Message


    I have a question hopefully you can answer:


    - Since ONP is traded on the AMEX and has to make SEC filings, is there any way the SEC could actually investigate ONP themselves? (Or any China-based company for that matter). I'll admit, I'm unclear on this issue since ONP is actually a Chinese company who exclusively relies on revenue generated in China. The reason I ask is because of, what I perceive as legal maneuvering by ONP and Loeb & Loeb with Deloitte being retained to "provide support". Since it has yet to be determined (or at least made publicly known), what exactly that means, I personally will have a hard time completely believing any finding that result from the "investigation" - especially if they find ONP completely innocent of fraud. (sidenote - I still have an issue with ONP, their Board of Directors, and Loeb & Loeb's insistence on using the word "investigation", instead of "audit"). As I've stated before, and to which I believe you agree on, the statements by ONP in their own SEC filings are inconsistent and make it hard to take ONP's word at face value. Thus, I would be inclined to believe any results the SEC would come out with, if they were to get involved. So, could the SEC get involved, if they wanted to?
    10 Aug 2010, 12:19 PM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2532) | Send Message
    Author’s reply » CSMhater;
    Orient Paper is actually a U.S. holding company. We call it a Chinese company because It's main operating entity is a Chinese company. However, Orient Paper does not own this operating entity, but controls it through a variety of contracts, which makes it what is referred to as a "Variable Interest Entity" and allows it to consolidate its financial reporting.
    Yes, the SEC can investigate any company trading on any of the exchanges here in the U.S.
    I understand your concerns about the investigation and your greater faith in the SEC. I just don't know and would have to see the report. In fact, I would rather not rely on either of them. What I l look to is the evidence they present, and the extent I can verify it, so I can follow up and make my own conclusions.
    To add more fuel to the fire concerning Loeb & Loeb, Whalehaven Capital is a big investor in many of these PIPES. Came across this looking at LPH, another China small cap reverse merger, in which Whalehaven had shares and bonds. Whalehaven also loans money. Whalehaven gets into a fair bit of litigation in these matters. Interesting to see Loeb & Loeb representing Whalehaven.
    But, yes, to answer your question, the SEC can get involved in they want to, absolutely.
    10 Aug 2010, 12:33 PM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2532) | Send Message
    Author’s reply » also, yes I agree that ONP's own SEC filings are inconsistent on several matters that I view as significant. I have tried to detail many of those in my posts.
    10 Aug 2010, 12:35 PM Reply Like
  • CSMhater
    , contributor
    Comments (388) | Send Message


    I'm not sure if this would qualify as a discrepency, but like you had stated previously on a different comment post, I too, am constantly re-reading ONP's SEC filings and am finding something new. Here's what I found [page 14 of 2008 10-K filing, under Risks Related To Our Business] -


    "We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds, our internal controls may not be adequate.
    We are constantly striving to improve our internal control over financial reporting. We expect to continue to improve our internal accounting control for budgeting, forecasting, managing and allocating our funds and to better account for them as we grow. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under US security laws."


    Huh? What? Are they basically stating they might 1) have difficulty managing their money; 2) have difficulty reporting accurate company financial information?
    Am I reading that correctly? Not exactly a statement to inspire confidence. Granted, I didn't find that same statement in the 2009 10-K SEC filing, but still...


    Just confirms if I had done a better job in conducting my own due diligence, I really doubt I would have invested in them in the first place.
    13 Aug 2010, 02:10 AM Reply Like
  • Business Economics Analyst
    , contributor
    Comments (2532) | Send Message
    Author’s reply » CSMHater:
    What I would do is just to see if this is just a standard disclaimer or disclosure that most companies use or not. So, I would look at a number of well established U.S. companies 10k's to see if they have the same disclosure or a different one. (You can search fast by just picking a couple of words and searching on them one by one). You could also look at SEC or accounting rules regarding disclosures on internal accounting controls.
    I did detail in my first instablog on ONP that they had actually disclosed that they had "inadequate internal financial controls" and would be remedying them. When nothing was filed about remedying the problem, the SEC followed up. At that point, there was a new CFO, who stated that the disclosure was "inadvertent". My question is how do you make an inadvertent disclosure that you have inadequate internal financial controls?
    Looking at your posts, I saw an earlier question you asked that I did not answer. I don't see a problem with ONP"s reporting concerning converting to dollars. If the yuan strengthens against the dollar, the same amount of yuans will buy more dollars than before, so revenue will be increased in the conversion. Looking at it the other way, if the yuan strengthens, it will take more dollars to buy the same amount of yuan. Also, I believe it is appropriate for ONP to convert yuan to dollars when reporting on the U.S. exchange.
    13 Aug 2010, 11:34 AM Reply Like
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