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Kurt Shrout
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Kurt has a BA and MA in Communication and over 20 years of business experience, almost always serving as a project or program manager, director, or consultant or as an analyst. He lived and worked in many different locations in the U.S., London, England, and Hong Kong. He has experience in at... More
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  • U.S.-Listed Chinese Stocks - Gravely Mistreated & Far Undervalued (Part 1) 17 comments
    Feb 8, 2011 3:09 PM | about stocks: YONG, HRBN, ONP, CSKI, CCME, NIVS, ABAT, ALN, BEST, BORN, CADC, CAGC, CGA, CHBT, CELM, CEAI, CHOP, CILE, CMFO, CNIT, CSR, CTFO, CVVT, HEAT, LIWA, DQ, MY, NEWN, SKBI, SPU, SUTR, TPI, TRIT, TSTC, UTRA, WATG, YUII, ZOOM, ZSTN, XIN, SORL

    Preamble:  Despite the fact that Seeking Alpha has recently published many articles from short-side authors that were obviously biased and shoddily researched (and did a lot of unjustified damage to the portfolio value of long-side investors and some unjustified damage to the companies being unfairly criticized), they declined to publish this article—in its current state at least.  I believe that Seeking Alpha, and/or its editors, are a part of the problem which I describe within this article under Part 1, point [4].  In addition, I am concerned that people within Seeking Alpha and/or people affiliated with Seeking Alpha personnel may be shorting the stocks that are being unfairly criticized within published articles prior to article publication.   I am posting this article as an Instablog.  If you have any suggestions as to another place(s), other than Seeking Alpha, where I can post this article, please share them with me.  Also, I join with those who advise others to be very skeptical about the information published by Seeking Alpha, especially if the information is short-side stock information.

    More-and-more, we are seeing written articles, web blogs, message board postings, and television segments in which U.S.-listed Chinese stocks, especially the ones that came into being via a reverse merger, are characterized as far more risky and/or frauds.  These characterizations have occurred ad nauseam.  Sometimes these characterizations have been made regarding the stock segment as a whole, sometimes they have been made in regard to individual stocks within the segment, and sometimes they have been made in regard to the segment as a whole and an individual stock(s) in conjunction.

    In brief, these characterizations are almost entirely false.  Like in any stock segment, occasionally, a stock like RINO International is found.  (RINO International appears to have overstated their past revenue since two contracts for which they reported receiving revenue were never finalized.)  Despite the very bright spotlight thrown on this stock segment for an extended period, there is not reliable evidence that these stocks are far riskier; and it is becoming clearer and clearer over time that, entirely or almost entirely, the underlying companies are not frauds.

    In fact, since the prices of these stocks have been beaten down to such a ridiculously low level based upon almost-entirely-false information, they represent a fantastic buying opportunity for individual investors.  Normally, this kind of buying opportunity is limited to venture capitalists and the like.  In this segment, individuals have a venture-capitalist-like opportunity.  Like a venture capitalist, though, you need to do your due diligence to separate the truly great opportunities from the overstated opportunities and the occasional fraud.  In this way, it is just like investing in U.S.-or-Western-European-based companies; but it has far greater upside potential.

    What has been happening is this:  People know that they can easily make money in this segment by shorting the stocks and, then, often with or via collaborators, communicating a series of lies, exaggerations, and/or misrepresentations that will drag the stock price down.  One of these many lies, exaggerations, and/or misrepresentations may hit on what proves to be, in part if not in whole, a true flaw regarding the investment.  Almost always, they hit on nothing or nothing significant.  It doesn’t matter much, if at all, to the shorter if any of the lies, exaggerations, and/or misrepresentations hit.  The stock price still goes down, at least for a while.

    Is this unethical?  Yes, of course it is.  Will this continue?  Yes.  How can it be stopped?  Via multiple measures.

    (1) The impacted companies are just now starting to speak out well in response to these attacks.  This trend must continue and strengthen.  Generally, they should not be silent regarding any unfair criticisms that largely affect the stock price, even if the affect on the stock price is temporary.  Also, if when a legitimate, significant question is raised that the company has not answered or answered well enough before, they should always answer the question publically.  (A criticism can, potentially, be valid.)

    (2) The companies should always consider legal action as a potential course of responsive action.

    (3)  U.S. regulatory authorities need to address the situation.  It is an outright embarrassment that we have done nothing regarding the grave mistreatment of the companies in this stock sector.  It is also rather humorous that we have done nothing, in the context of all the unfounded or exaggerated claims about how relatively untrustworthy these companies are because they are Chinese.  It appears that they can’t trust us, not the other way around.

    (4) The more-reputable, and supposedly more-reputable, U.S. news sources should stop covering this story in a biased and/or unprofessional manner.  Barron’s and CNBC seem unlikely to do this.  All of us who are knowledgeable regarding the news realm know that, often, what passes for news is simply a part of someone’s and/or some institution’s agenda.  It is clear that, for the time being at least, people at these institutions want to get us to invest in U.S. companies, even though these investments are relatively much less attractive.  Expectations are higher for places like Bloomberg and The Wall Street Journal; yet Bloomberg recently published an article on Waldo Mushman without doing proper investigation.  If they had investigated properly, they would have readily seen that the Mushman, as is standard for short proponents in this stock space, is regularly inaccurate in his criticisms and does not issue retractions.  In fact, they would have found things like this:  “The management of China Sky One Medical reminded investors that Waldo Mushman was misleading investors by counterfeiting SAIC documents and posting them on its website and other blogs.”  (Source:  http://www.skyonemedical.com/English/newsshow.asp?hid=848)  I hereby challenge the U.S. and other business news services to do unbiased, high-quality investigative journalism regarding the point-by-point accuracy and integrity of the short proponents in this space.  If and when they do, the results will be shockingly (to many people) unflattering.

    (5)  The many well-known and reputable individuals and institutions in this space as long-side investors should be more involved.  It may be too difficult or time-consuming for a news service like Bloomberg to go through all of the more-recent major SEC filings, visit locations in China, et cetera, related to a company(s) that has been unfairly criticized.  These bigger investors have already strongly vetted these investments.  They are a resource via which the many unfair short-side contentions can be more-readily debunked.  They should also consider legal action as a potential course of responsive action.

    (6)  The bigger, more-renowned brokerages, et cetera, should initiate coverage on some of these stocks—and not simply for newer issues for which they may have helped with the financing and/or listing.  Some of them are far better investments than the vast majority of stocks that are currently covered.

    If/when any of the many short-side people who lie, exaggerate, or misrepresent respond to this article, I may simply ignore them.  It is only worth spending a limited amount of time responding to falsehood after falsehood after falsehood.  If, on the other hand, you are not one of these people, and you think I was significantly inaccurate with something I wrote above, you think that something I wrote above should be enhanced, or the like, please do point this out to me.

    Disclosures:  I am long YONG and HRBN.  Otherwise, I do not have a position regarding any of the companies mentioned in this article.



    Disclosure: I am long YONG, HRBN.
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Comments (17)
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  • Mike Renaldi
    , contributor
    Comments (130) | Send Message
     
    SEC needs to step in and protect these companies. The Waldos, Matt Berrys, Al Littles, Business Econ Analysist, the Bens all should be investigated imho.
    9 Feb 2011, 08:43 AM Reply Like
  • friendly
    , contributor
    Comments (9) | Send Message
     
    Yea! But every one of us must become proactive and provide the SEC with evidence, and encourage others to do the same, so the SEC will take it seriously and put its resources to work.
    10 Feb 2011, 06:12 AM Reply Like
  • Jion
    , contributor
    Comments (453) | Send Message
     
    Good article, the idea to concatenate it with several Chinese stocks was the reason to find via LZEN. Thanks.
    9 Feb 2011, 09:51 AM Reply Like
  • friendly
    , contributor
    Comments (9) | Send Message
     
    This is a great article.

     

    It describes grand injustice inflicted upon great Chinese companies and upon many investors from around the globe who trustfully believe these companies have extraordinary growth potential.

     

    The damage is counted by the billions of dollars!

     

    This wild and unregulated behavior by ill intentioned bodies must be uprooted altogether and brought to justice.

     

    The issue must be brought under a powerful spot light on the center stage provided by the leading media outlets, such as WSJ, Bloomberg, CNBC and the like.

     

    And top tier law firms that are of the required expertise must be briefed and urged to take initiative and file the necessary documents with the relevant legal authorities.

     

    My greatest fear is that these best of breed Chinese entrepreneurs, who believed the great effort to overcome the many obstacles and succeed in being publicly traded in the leading stock exchange of the free world would serve them profoundly, will become collectively gravely disappointed and take their business elsewhere!

     

    This possible outcome could prove to be no less of a world class scandal and a colossal loss for many investors who will loose both a substantial part of their already invested capital as well as a once in a generation investment opportunity to take part in THE growth story of this century.

     

    EVERYONE with a sound mind and a strong sense of justice must act the best he can on all fronts in this pivotal fight of restoring the faith, honor and value of these fine and unique Chinese companies!
    9 Feb 2011, 11:53 AM Reply Like
  • Value Digger
    , contributor
    Comments (3398) | Send Message
     
    Great article !

     

    Except RINO case, ALL the other are clueless allegations serving the shorters pockets.
    All claims against ONP, UTA, CEU etc. have been proven wrong.

     

    Some minor issues exist EVERYWHERE even in the most reputable AMERICAN companies .
    Let's not search the numerous small cap AMERICAN companies where the potential fraud is almost certain if sb investigates them meticulously.

     

    SEC must decide seriously and prosecute them .
    The IP addresses are there although most of them are known in the investing community.So it is easy to find.

     

    Jim Chanos is shorting chinese stocks. This is a fact.
    Who knows whom (shorters/bloggers) he is affiliated with?
    Has SEC ever investigated the affiliates of Jim Chanos and other shorters for instance?
    10 Feb 2011, 07:04 AM Reply Like
  • David Addison
    , contributor
    Comments (64) | Send Message
     
    Where are they now?
    30 Aug 2013, 05:17 PM Reply Like
  • Value Digger
    , contributor
    Comments (3398) | Send Message
     
    Kurtshrout,

     

    i think this article should NOT be in instantblog.

     

    I believe you should contact seeking alpha to release this article at the headlines of Yahoo as it happens with other similar seeking alpha articles .

     

    Hopefully the seeking alpha folks are objective and they will agree with your request. If not, they are shady too.....
    Things are simple.
    10 Feb 2011, 07:31 AM Reply Like
  • Value Digger
    , contributor
    Comments (3398) | Send Message
     
    Kurtshrout,

     

    just fyi, Look below the PROVEN AMERICAN accounting frauds. They are PROVEN and the companies have ACCEPTED it, it is not just clueless allegations released by some shorters or bloggers affiliated with hedge funds.

     

    The latest one is GMCR of course. Nevertheless we did not see any negative impact on the stock price just because it is AMERICAN ! These unethical clueless shorters HID the case too.

     

    This is a list with a SAMPLE of the PROVEN AMERICAN frauds. Those who doubt it , they can ask the companies or google to find the details of the FRAUD.

     

    GMCR (green mountain)
    XEROX
    AOL
    Brystol Myers Squibb
    DUKE ENERGY
    DYNEGY
    HALLIBURTON
    MERCK
    Chiquita Brands (CQB)
    KMART
    ImClone Systems
    BEAZER HOMES (BZH)
    Green Mountain Coffee (GMCR)
    QWEST COMMUNICATIONS
    Peregrine Systems
    ZZZZ BEST
    Miniscribe
    RELIANT ENERGY
    NORTEL
    ENRON
    Nicor
    MIRANT
    SUNBEAM
    WORLDCOM
    DELL
    AIG
    TYCO
    WASTE MANAGEMENT (WM)
    HEALTH SOUTH CORPORATION
    GLOBAL CROSSING
    HOMESTORE.COM
    FANNIE MAE
    FREDDIE MAC
    LEHMAN BROTHERS
    BEAR STERNS
    WASHINGTON MUTUAL
    ADELPHIA
    WACHOVIA

     

    and some more PROVEN AMERICAN fraud

     

    www.floridasecuritiesf...

     

    and some more PROVEN AMERICAN fraud

     

    finance.yahoo.com/news...

     

    Let me know, i can post much more PROVEN AMERICAN fraud if this does not suffice you.
    10 Feb 2011, 09:19 AM Reply Like
  • JoTeng
    , contributor
    Comments (363) | Send Message
     
    When the criminal indictments come down for the recent tidal wave of fraud associated with the short attacks on China many folks think that associates or employees of SeekingAlpha will be indicted as well.

     

    CLEARLY, there is front running ahead of these articles and part of the investigative process will include deposing some folks from SeekingAlpha under oath.

     

    Note: Many are also waiting for the next shoe to drop concerning Mr. Chimin and the allegedly forged CCME documents. If indeed they were forged then it is certain that SeekingAlpha and the author will be getting a letter from the Rosen Law Firm and a host of others as well.
    10 Feb 2011, 03:09 PM Reply Like
  • arartre
    , contributor
    Comments (25) | Send Message
     
    " RINO International appears to have overstated their past revenue since two contracts for which they reported receiving revenue were never finalized. "

     

    This is what the CEO said. However, read RINO's last 10K and see that was not deceptive behavior but allowed by RINO's revenue recognition methodology. Whether this methodology was overly aggressive can be legitimately debated but there was nothing surreptitious about it as shorts would like everyone to believe.
    10 Feb 2011, 05:22 PM Reply Like
  • Kurt Shrout
    , contributor
    Comments (301) | Send Message
     
    Author’s reply » Can you provide a relatively brief description of the revenue recognition policy that allowed RINO to recognize revenue for contracts that were never finalized? I’ve never heard of any revenue recognition policy that would allow this for the kind of work that RINO does. In so doing, if you can give us a quote and/or page number from the 10K, it would be good.
    11 Feb 2011, 08:38 AM Reply Like
  • arartre
    , contributor
    Comments (25) | Send Message
     
    Bottom of pg37 in Rino's 3/31/10 10K :

     

    Revenue Recognition
    Contracts. The Company enters into long-term fixed-price contracts with customers to manufacture and install industrial equipment.
    Revenue on long-term fixed-price contracts is recognized under the percentage-of-completion method. Under the
    percentage-of-completion method, management estimates the percentage-of-completion based upon costs incurred to date as a
    percentage of the total estimated costs to the customer. When total cost estimates exceed revenues, the Company accrues for the
    estimated losses immediately. The use of the percentage-of-completion method requires significant judgment to estimating total
    contract revenues and costs, including assumptions relative concerning the length of time to complete the project, the nature and
    complexity of the work to be performed, and anticipated changes in estimated costs. Estimates of total contract revenues and costs are
    continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract
    progresses. When revisions in estimated contract revenues and costs are determined, such adjustments are recorded in the period in which they are first identified.

     

    A controversial policy but not undisclosed.
    11 Feb 2011, 07:00 PM Reply Like
  • arartre
    , contributor
    Comments (25) | Send Message
     
    " The use of the percentage-of-completion method requires significant judgment to estimating total contract revenues and costs "

     

    Rino did business with state owned steel companies that were ordered to clean up or shut down. Rino could assume it was inevitably going to get a contract and begin fabricating in anticipation of eventually signing. The importance of personal relationships in a controlled economy could lead the CEO to make what would be an unexceptably aggressive judgment in a free western country. I'm not saying it's right or defensible but that judgment is understandable under the particular circumstances.

     

    One other thought on your article. Are investment banks, who were denied possible income by chinese companies choosing the reverse merger process instead of a traditional IPO, tacitly or overtly complicit in a campaign to see the companies fail as investment vehicles ? It is in the investment banks' financial interests to see the reverse merger route sabotaged.
    11 Feb 2011, 07:22 PM Reply Like
  • Kurt Shrout
    , contributor
    Comments (301) | Send Message
     
    Author’s reply » Thanks for the RINO revenue recognition, et cetera, explanation.

     

    Yet another thought on the article is: Are big-money investors and institutions trying to get and keep these stocks ridiculously undervalued so they can, potentially, buy the best of the underlying companies extremely cheaply? The stock prices are so low that they could swallow the loss on their shorting, if they themselves did short, and still make a vast amount of money via a privatization deal. A key to this strategy is screwing the other short sellers of the stock, something which is rather humorous when you think about it. I suspect someone(s) is currently trying to do this in regard to YONG, which is making me think that, maybe, this is what happened with HRBN.
    12 Feb 2011, 04:33 AM Reply Like
  • arartre
    , contributor
    Comments (25) | Send Message
     
    It's hard to see how the initial shorts will lose money. For the " me too " or late to the party shorts it's an entirely different situation as you suggest.

     

    In order for initial shorters to cover cheaply, they need late-comers to keep the price down. Late-comer shorts will discover the initial shorters are no more bothered by screwing them as they are by screwing longs. It's all about timing and making money. Whose pocket it comes from is totally irrelevant.
    12 Feb 2011, 09:49 AM Reply Like
  • Streetdog
    , contributor
    Comments (33) | Send Message
     
    I was not involved in RINO, so never climbed into the 10-K. Thank you for fitting in another piece of the puzzle. After a lot of hours of research at this point, I have yet to find any strong justification for the general tweaking this sector is getting.
    14 Feb 2011, 04:56 PM Reply Like
  • numericalexample.com
    , contributor
    Comments (29) | Send Message
     
    Thanks for your article, I enjoyed reading it. I have been investigating the arguments of the shorts and I think you are right. I have written a similar article on CSKI that has been rejected by SeekingAlpha as well. Instead I posted it on my own smallcapvalue.info blog.
    11 Feb 2011, 04:44 PM Reply Like
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