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Orient Paper's best and funnies defense against fraud allegations

This is a repost of an entry from my investing blog made on July 14 2010.

Stock of Chinese company Orient Paper Inc (ONP) has been whacked by an earlier report from the research firm "Muddy Waters Research", calling the company a complete fraud.  The report exposes ONP's exaggerated its assets values, revenues/earnings as well as misappropriated funds from investors by exaggerating equipment purchase prices.  A full report can be downloaded from Muddy Waters website 
here.

 

From what I have seen so far, ONP clearly sounds like a total scam going public only for the purpose of raising money.   It went public with a shady reverse merger and questionable VIE legal structure.  Aside from an investor relation website created obviously by some 3rd party PR firm, it doesn't even Chinese version of its website for the products.  From the pictures I've seen in the Muddy Waters report, the factory looked no where close to generating the $102 million revenues in 2009.  Its auditor has previously audited a fraudulent reverse merger company called China Expert Technologies Inc (OTC:CXTI).  It has done several private placement deals at pretty silly low valuations which make no sense for a rational company to pursue.  Being one of the best and most promotional Chinese company I've ever seen, ONP set out to defend themselves with a press release (link here) on June 30, 2010.  In the press release, the excuse used by ONP to trash one of the key evidence cited in the Muddy Waters report, the SAIC records filed with Chinese government, was from a different company with a similar name.  Oh C'mon is this Muddy Water really that stupid to make a conclusion about a fraud based on the filings of a wrong company?   As I expected, Muddy Waters immediately published an update to its report, confirming the SAIC filings they obtained was indeed for Orient Paper's Chinese subsidiary.  Funny, in the second press release ONP published on July 6 to further respond to the fraud allegations (link here), there was no mentioning of the previous explanation that SAIC filings for an incorrect company have been used.   ONP made a list of detailed, obviously well rehearsed, responses to most issues raised by Muddy Waters.   Phrases such as SAIC filings from a wrong subsidiary was never mentioned again by the company from that day.

 

It's apparent ONP lied about its financials in order to raise money from the investors.  But it's even more outrageous for them to lie in front the evidence, making a ridiculous claim such as wrong SAIC filings.  I don't think how "smart" management like this expect to get away with lies like this.  Either they were in such a hurry to come up an explanation and screwed up badly, or they simply thought the investors are so dumb to fool.  Time shall tell who's smart and who's dumb.

 

Full disclosure: Short ONP.  This is not a recommendation to buy or sell the stock.  I may make changes to my portfolio without providing any update.