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Chris DeMuth Jr.
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  • New Sheriff, Same As The Old Sheriff 7 comments
    Dec 17, 2012 10:40 AM | about stocks: ONP, CHBT, SCOK, TSTC, CVVT

    Earlier this month, the SEC charged the Chinese affiliates of the big four accounting firms with violating U.S. securities laws. Supposedly, they were enabling Chinese frauds, which were listing in the US in order to abscond with cash in US-listed shell corporations. The SEC de-registered the securities of 50 companies and filed fraud cases against 40 security issuers and executives. How did things get this far? Didn't anyone know? The scale was massive, the capital destruction is in the billions of dollars, and none of the accountants stopped it.

    Before answering that question, it is important to understand the role of enforcement agencies and their relationship to crime. They bring criminals to justice and shut down criminal activity after the crimes have been committed. This is a crucial role for the protection of our society, but it comes after victims have been hurt and sometimes ruined. To avoid being a victim oneself, one must be prepared to protect oneself from crime - whether a physical crime or a financial one.

    The auditor's Chinese clients had patent inconsistencies between their tax filings in China and corporate filings in the US. They offered little or misleading disclosures about their activities. At the same time, they were accessing the billions of dollars available from US-listed shell companies. At their peak, such companies had a combined market capitalization of over $20 billion. Almost all were frauds. Many were named "China", "Orient", or "Sino" in order to attract the interest of easily duped westerners in search of a connection to China.

    As recently as two years ago, a majority of our short ideas were US-listed Chinese frauds. The list includes Orient Paper Inc (NYSEMKT:ONP), China-Biotics Inc. (OTC:CHBT), SinoCoking Coal and Coke (NASDAQ:SCOK), Telestone Technologies Corporation (NASDAQ:TSTC), and China Valves Technology, Inc. (OTC:CVVT). Their average performance has been a loss of 92% since the positions were first established. About forty percent of the securities have been de-listed. Others are trading close to zero and are currently out of compliance with the rules governing their exchanges.

    What are the lessons that we can draw? Two come to mind. First, investors should not outsource fraud detection to highly conflicted service providers. After establishing our positions, we took our work to one of the US auditors subsequently named in the SEC charges. They understood our concerns, but responded that they get paid a lot by Chinese clients, their competitors were doing the same thing, and the local affiliates use the auditors name but are not technically the same company as the US-based firms. Not comforting.

    Secondly, the fastest and most ruthless regulator that fraudsters have to face is the regulation provided by the market itself. Market regulators in the form of short-sellers were actively engaged in primary research into this fraud years before the government regulators took notice. In the intervening years, U.S. investors already took most of the loss that they were exposed to. And during those years, more scrutiny has been directed towards the market regulating short sellers than on the Chinese frauds that the short sellers were uncovering.

    Disclosure: The author is short SCOK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

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  • Chris DeMuth Jr.
    , contributor
    Comments (9291) | Send Message
    Author’s reply » SinoCoking Coal and Coke Chemical Industries to Change Company Name to Clean Synthetic Technologies:


    PINGDINGSHAN, CHINA, Jul 14, 2014 (Marketwired via COMTEX) -- SinoCoking Coal and Coke Chemical Industries, Inc. SCOK +20.51% ("the Company" or "SinoCoking"), a vertically-integrated coal and coke processor, today said that, subject to shareholder approval and satisfaction of applicable laws, it intends to change its name to Clean Synthetic Technologies Corp. The name reflects the Company's new emphasis on the large-scale production of clean-burning synthetic gas and other clean energy products. Concurrent with the name change, the Company expects to change its stock trading symbol on Nasdaq.


    SinoCoking is currently in construction on a green facility for the conversion of carbon dioxide into synthetic gas (syngas), a fuel utilized to produce clean energy and a wide range of fertilizers, solvents and other industrial products. This facility, which is scheduled to begin operations in the fourth quarter, will produce as much as 25,000 cubic meters of syngas per hour, among the highest outputs in China.


    "Clean Synthetic Technologies is more than just a new name. It is a new identity," said Chairman and CEO, Mr. Jianhua Lv.


    "Going forward, we have two primary objectives. First, we will strive to become one of China's leading producers of clean energy products -- products capable of generating new streams of high-margin revenue for our Company and allowing it to grow and prosper as never before.


    "Second, and no less important, we are determined to help our nation alleviate the pressing air pollution and global warming problems we face. As President Xi has stated, the time has come for China to begin replacing coal with a cleaner energy source. The clean-burning syngas we will soon be producing at our new facility has the potential to do exactly that. The result, we believe, will be a healthier environment for our citizens and their children for decades to come."


    Mr. Lv said the Company will shortly issue an update on construction progress at the new facility.
    14 Jul 2014, 12:54 PM Reply Like
  • TimeOnTarget
    , contributor
    Comments (3459) | Send Message
    Conversion of carbon dioxide into syngas . . . .


    Which I assume means the CO component of syngas, since carbon dioxide doesn't have any hydrogen in it.


    So, they have a process to strip one molecule of oxygen off a carbon dioxide molecule, which then gets added back when the syngas is combusted.


    I'm not a scientist, but I'm not getting how that is going to add a lot of energy value . . . .
    13 Aug 2014, 04:12 PM Reply Like
  • Ledaumas
    , contributor
    Comments (16) | Send Message
    Yes, SEC and other don't act until lives have been destroyed, even when they're warned in advance of the fraud. It is up to us not to work for these companies, and certainly not to buy their stock. Of course, sometimes it's hard to tell a fraud when you first start working for them.
    22 Sep 2014, 02:20 PM Reply Like
  • batistuta009
    , contributor
    Comments (136) | Send Message
    Because this company has no website?
    So why not be a fraud?
    7 Oct 2014, 04:12 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (9291) | Send Message
    Author’s reply » SEC Imposes Sanctions Against China-Based Members of Big Four Accounting Networks for Refusing to Produce Documents:
    6 Feb 2015, 04:42 PM Reply Like
  • bazooooka
    , contributor
    Comments (3578) | Send Message


    Are you still short SCOK; did you add to your short during the Summer spike?
    6 Feb 2015, 05:04 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (9291) | Send Message
    Author’s reply » Happily, yes and yes.
    6 Feb 2015, 05:10 PM Reply Like
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