I have posted this blog not because I particularly care who buys or sells Kandi stock, it is your money and you should do with it what you like. I have posted this because I am tired of all of the false or misleading rhetoric being spread on the company causing innocent shareholders to sell for the wrong reasons. If you look at my SA "Bio" you will see that I have over 41 years of extensive Stock Market Experience. Re. KNDI, I have followed it closely and been a shareholder and solid supporter since it first started trading in the US in mid-2007 and have made two personal trips to China specifically to visit the Company.
This blog is not aimed at the Investor who has little or no knowledge about KNDI. It is targeting those existing shareholders who do have basic knowledge and are concerned about the barrage of recent attack articles launched by declared short sellers in just the past two weeks and why these shorts are currently feeling so motivated. If you are new to KNDI I suggest you start your Due Diligence by reading some of the recent PR's put out by the company, and their SEC Filings followed by the many SA articles, both pro and con published to date.
Three and a half years ago the SEC said it had put together a "task force" to scrutinize China Companies trading in the US likely due to all the ChinaPhobia based on hundreds of short seller attack articles at that time. Maybe to some a form of racial profiling, but no real threat to the vast majority of honest China companies listed here like NASDAQ listed Kandi Technologies, Group Inc. (KNDI). But rightfully bad news for those few who purposely try to scam US investors. Penalties for China wrongdoing companies are really no different than that of the hundreds of US based companies caught violating Securities rules each year. Anything from stock halts and delisting to fines and censures.
Most of the "violators" caught and penalized to date never reached the "listing" stage on one of the major US Exchanges; and even fewer who started trading here through Reverse Mergers or Reverse Takeovers (RTO) have been severely penalized after passing several rounds of SEC Registered Financings after being listed on a major stock exchange. In reality, other than a sponsor Investment Banker, the only difference between a RTO company in a SEC reporting shell company and an IPO Company is an Audited Registration Statement approval by the SEC for new share issuance at the time of initial trading.
Yes, Kandi Technologies did come public in the US by way of an RTO similar to other successful public Companies such as, Occidental Petroleum, Turner Broadcasting, Tandy Corp. (Radio Shack), Texas Instruments, Jamba Juice, and even Berkshire Hathaway. Some (likely at times to include KNDI's CEO with all of the short & distort abuse his Company has had to deal with the last few years) might say "regrettably", but realistically, it is very unlikely US investors ever would have had the opportunity to be shareholders in what is now clearly China's #1 EV player had the Company not come public through the US RTO route.
A Little Background Here
Around the beginning of 2007, a Canadian businessman by the name of Paul Kelly, whose Company specialized in bringing China companies to the US to trade was introduced to KNDI's founder and CEO as a possible RTO candidate. Based on what at that time appeared to be a successful track record on bringing several other China companies public in the US, Kelly convinced KNDI's founder to also become public in the US. While KNDI shares first started trading in the US mid 2007 on the OTCBB market, a year later it was approved for listing on NASDAQ and received approval by the SEC for first registered financing Dec. 24, 2009. KNDI completed its first US financing in Q1, 2010. From that first approved Registration Statement to current, the SEC has satisfactorily reviewed and declared "Effective" a total of 7 Registration statements. With this background in place, let's jump to the Fact Finding Investigation short sellers would like you to be concerned about. But to first set the record straight.
Contrary to what others may want you to believe, KNDI had no requirement to make this investigation public. While some may be upset that the Company elected to publicly report it anyway, it goes to show how important it is to its CEO to be as transparent as possible. As you can see from the SEC's own website, it does not require any company to publicly disclose Investigations unless or until it files an action in court.
Investigations by the Securities and Exchange Commission
"Securities and Exchange Commission (SEC) investigations are conducted confidentially to protect evidence and reputations. Important documents could be destroyed if an investigation is publicly announced, so confidential treatment may help to preserve key evidence in a case. A confidential process also protects the reputations of companies and individuals where the SEC finds no wrongdoing by the firm or the individuals that were the subject of the investigation. As a result, the SEC generally will not confirm or deny the existence of an investigation unless and until it becomes a matter of public record.
An investigation becomes public when the SEC files an action in court or through an administrative proceeding. The SEC website contains information about public enforcement actions. For additional information on how SEC investigations work, please see the following bulletin by the SEC's Office of Public Affairs."
The Roots of the Much Talked About SEC Investigation.
In Mid-2013, the investigation against Kelly, et. al. (the 5) began at least six months before KNDI was subpoenaed making, IMO, the ultimate inclusion of KNDI inevitable if for no other reason than to get sworn info from the Company about the 5. And while two have settled, one is assisting the SEC and two more are continued to contest the allegations against them. (One of which is extremely wealthy and can certainly afford to fight as long as necessary.) So under any circumstance, I personally, don't expect any end to this until at least the time when all the 5 have settled or been adjudicated, irrespective of whether or not any KNDI wrongdoing comes to pass.
But based on common sense, once the SEC starts subpoenaing records, particularly with all the cry baby short sellers sending speculative negative comments, insinuations and suggestions to the SEC, KNDI the company would also likely be scrutinized as in the case of any public company, China or U.S. With this type of microscopic scrutiny, it would not be surprising if something turned up if for no other reason than unintentional oversight or translation discrepancies. But this scrutiny is the Good Thing I am getting at with this blog.
Particularly because I was aware of the 5 party promoter investigation as early as mid 2013 as I referenced in the link above. Subsequently, when the Company filed a normal S3 Registration statement in October of 2013, an event that usually takes 30 days or so to be approved, but after two months later still had not received approval, I started to become a bit suspicious that KNDI had now been brought into the investigation.
My small concern at the time had nothing to with the accusations made against the 5, even if it were true that Kandi's Founder and CEO Xiaoming Hu gave them some 350,000 shares in Sept. 2009 for "stock promotion"; there is nothing illegal about any Company paying for IR with stock. As long as the Company reports the new shares in its SEC filings. BTW, at the time the SEC PR and "Complaint" came out on the 5, I immediately called Kewa Luo, KNDI US IR and asked her to ask Mr. Hu if he would affirm or deny the accusation he gave shares to Lockhart and Tazbaz in Sept. 09 as stated in the SEC Complaint. Knowing how conservative Mr. Hu was based on spending time with him on my two visits to the Company in China, I would have found it very surprising if this accusation were true. Her response the next day was Mr. Hu said it Did not happen. Not stock, or warrants.
I then found out from very reliable sources that both Lockhart (who had already settled by that time with the SEC and certainly had no incentive to lie) and Tazbaz (who is still fighting) also denied it ever happened. Subsequently at the recent San Francisco Shareholders Meet and Greet in Sept. (which I attended) Mr. Hu, when asked about the Investigation by an attendee, reiterated to the group that the giving of shares or warrants to either of the two did not happen. His only possible speculation how this subject may have come up was tied to a transaction (similar due only to timing and security size) involving 350,000 $2.50 warrants (not shares as mentioned in the complaint) he did use to pay two Chinese Auto Marketing Consultants for EV research in China around the same time.
These warrants at $2.50 were at a significant premium to the market price of the shares at the time and a big difference from "giving" shares for free as mentioned in the "complaint". Plus, if the rest of the accusation that the "shares" were to be given as incentive to "move" the stock to over $3.00 was accurate, the small $.50 difference and fact the warrants were not part of any registration statement, so they would have to be exercised first, then held for at least six months before they would be liquid, leaves little if any incentive for a promoter. CEO Hu at the meeting said the China consultants completed part of their job and did earn the right to convert 250,000 warrants which they subsequently exercised but lost the last 100,000. All this has been reported in past SEC filings going back to that time.
So, since there was no upward adjustment in any shares in subsequent SEC filings to account for the supposed 350,000 shares given, only the shares ultimately exercised by the China consultants, my thought at the time was either they were legally given and accounted for, or it didn't happen. Now one might wonder why the SEC is trying to make an issue out of this at all if it is legal for the Company to give stock or warrants in the first place? Well, had the Company given stock promoters shares, depending on how the promoters "used" the shares, there could easily be a "case" against the promoters.
But let's get back as to why having KNDI under the eye of the SEC gives me much comfort.
As mentioned above, the SEC held up the October 2013 registration until June 6, 2014 followed shortly by two more registration which were approved on August 6, 2014 and August 19, 2014, totally representing some 7+ million shares and around $100 million cash raised. It was the initial delay which insinuated to me that the Commission was at least initially concerned that maybe KNDI did something serious enough to halt the shares. (IMO, certainly the SEC is not going to want to allow a Company to issue millions of more shares if it was likely they would turn around and halt trading) But by opening up and approving subsequent registrations after eight months of investigation, my assumption was that such a serious penalty as a "halt" is likely off the table. But does it mean KNDI could not face some possible fine or censure? Of course not. I doubt there is any significant NASDAQ or NYSE Company trading today that hasn't at one time or another faced some form of formal participation in an SEC investigation, from AAPL to GS, MSFT to XRX and according to rumor, possibly even TSLA,(Maybe TSLA followed the SEC Guidelines above and is saying nothing). Now in each of these cases, I am sure some short seller has attacked each Company planting fear of the investigation and enticing some ignorant shareholders to sell, likely with later regrets.
In KNDI's particular case, I think it goes without saying to knowledgeable investors that its exponential current growth, paired with KNDI's incredible "logical" China EV potential; much of which has appeared just during the last year while the Company has been under SEC scrutiny, is the reason the stock should be at least speculatively trading much higher. Common sense would dictate that any Company who knows they are under a "Regulator's" "microscope" would be extra careful to be accurate in their reporting. Giving me even more comfort, shortly after the Company was initially subpoenaed, they brought in the "Blue Chip" NY Based Pryor Cashman Law firm as new SEC counsel. You can bet they are also aware of any and everything the company is saying and requiring incontestable accuracy in reporting.
But, now we are seeing what appears to be a very desperate band of short sellers who have incredulously trapped themselves with a 7.5 million share short (27% of the non-insider float) paired with rapidly diminishing trading volume realizing they are approaching the cusp of financial peril. This due both to little or no stock left to borrow or if stock found "share borrowing rates" of up to 95% interest annually. As what is appearing to be a "last ditch" effort to hurt the stock, we have seen some 5 "Short & Distort" attack articles by declared short sellers published in just the past couple of weeks. And what is the topic dejour of all these articles? Is it the incredible recent growth reported in China? (Eight new cities for a total of ten added in just the past three months) Nope, it's the four and five year old, non-ev related items tied into the SEC Fact Finding Investigation.
Do I think the short sellers themselves are as "smart" as I am about why the SEC investigation is a "good thing" for KNDI patient investors? You Bet I Do. That is exactly the reason you see them being so desperate in trying to scare out shareholders ASAP!
How desperate are they? The recent attack article headlined and linked below tops any I have ever seen. The declared Short Selling author writing his first Seeking Alpha article was so desperate to cover his short position that he breached, IMO, a "Cardinal Sin" by personally invoking the name of the current SEC Commissioner in his headline in such an affirmative way; that any normal shareholder might assume she was about to personally bring an action against the Company,
Kandi Crushed: Mary Jo White's "Broken Windows" Policy Makes An SEC Enforcement Action Inevitable
Note, he didn't say it was his "opinion", or that the Enforcement Action was "possible". He said it was "Inevitable"! Not surprising, within minutes, well before anyone would have had time to read his lengthy tome, the stock dropped over 10% to a $11.30 low or over $50 million in value vanished on the heaviest volume in over a month in just a few minutes. But also not surprising, once investors had a chance to read the article and realized there was nothing new, just the exact same but slightly reworded "Short & Distort" Fears mongering published over half a dozen times in the past year by other short sellers, the stock rallied back regaining more than half the drop and by the next day was trading even higher than before the article. (see chart below) Likely a good bit of this rally back up was short sellers trying to cover to include the author himself taking advantage of his financially self-serving manipulation creating stock sales out of fear from innocent investors who took the headline seriously.
Chart Courtesy of Yahoo Finance.
I ran this article past two attorneys whose specialty is the practice of SEC law as to their opinion how the SEC, (The Commissioner herself in particular) would react to this apparently fraudulent tactic by a short seller. A short seller who if you believe his Seeking Alpha bio is a third year Harvard law student! Both were amazed at his culpable stupidity or desperation in titling the article the way he did. I further told them that this author, after having his article backfire and rally to higher prices, has now been continuing his fallacious attack against KNDI through heavy use of Twitter; even going so far as to starting to attack me personally in his some of his Tweets. (#Porcanzischeme childish, but not surprising) But also not surprising, both agree with my assertion that the SEC would not take lightly being used as a pawn to gain personal financial benefit by either long or short-sellers and the author would likely regret the day he stooped to this tactic.
In Summation: It is my opinion that the short sellers in KNDI are now under "Siege". Even with all these attack article the stock seem to not want to go down. While active traders may lose interest in the stock due to the tightening of liquidity, longer term intelligent longs should be happy in anticipation that the stock appears to be at a "tipping point". With the incredibly high 7.5 million share reported short position, (almost double a year earlier) paired with both small float and disappearing volume (Friday's slight move higher to $13.07 on only 357,000 volume, in spite of a hard down market was lowest ever with the stock trading about $7), it would only take one opportunistic hedge fund or large investor to realize the precarious position shorts are in and start buying the stock aggressively. As you can see from the chart below, this stock can make up the $9+ decline from its last years twin $22 highs in days, not months based on past trading action.
So, old Investors, sleep comfortably and embrace the SEC investigation. New investors thank the short sellers for the incredible speculative discount they created in KNDI shares. And both be thankful for the honest, brilliant and disruptive Founder/CEO of KNDI who has taken Kandi branded EV's in China from a "footnote" to the unquestionable current EV sales leader in less than a year and what's looking like its third consecutive 100%+ growth year.