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An Open Letter to Chinese Small-Cap Management, Re: Shark Repellent

Apr. 26, 2011 3:52 PM ETGURE, KNDI, TPI, ZSTN, JADE4 Comments
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Public Policy, Social Security, Portfolio Strategy, CEFs

Seeking Alpha Analyst Since 2007

I am a retired lawyer who specialized in tax, insurance, and employee benefit law.

Gentleman and Ladies:

Some of you are crooks.  If you are a crook, feel free to stop reading.

For the rest of you, I have great news.  Due Diligence Bank has created a line of credit solely for Chinese small-cap stocks that have been unfairly attacked by short sellers.  To be eligible for loans under this program, you must open your books and facilities to us for serious inspection.  We will do the financial equivalent of a cavity search, and, if you pass, we will promise to finance repurchase of your shares whenever they fall in value as a result of a short-seller hit-piece.  We will lend you enough money to buy as many shares as it takes to assure that the share price is not significantly moved for more than a few hours.  Interest on the line can be paid in shares.

We will publish the names of all companies that have passed our tests and whose shares are eligible for purchase under this program.  We will, in effect, do on the long side what these attackers are doing on the short side.  Only we won't lie about it, because we can't afford to, as we will be putting our money into your company AFTER it is attacked. 

We believe that merely being listed by us will increase the multiple of earnings at which your shares sell.  For many of you, that multiple is as small as one or two times earnings, thanks, in many cases to pieces published by short sellers who have figured out how to make their bets self-fulfilling.  Responding to such attacks with information is a good idea, but it's not a cure-all.  After all, denying that one is a liar hardly disposes of the charge.  We think lowering the pay-off is a far better strategy, especially since fear of being the next victim is keeping the price of your shares down.

We will charge a stand-by fee for our Shark Repellent line of credit.  We will need to charge the fee because we expect no actual drawings against it.  Why hit a company with a bottomless appetite for shares when there are real crooks out there to take down?  The fee can, of course, be paid in registered shares, which we will not sell for less than they are worth when we receive them.

We look forward to serving you...

[Is that so hard to imagine?  Surely, there is some institution in China that can credibly separate the wheat from the chaff.  I'm guessing that one will step up in some form or another, sooner rather than later.  Indeed, if one does not, I may conclude that there really AREN'T enough honest companies there to justify investing there.]

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