A Short History of Short Attacks, Part One
posted by The Traveller on Saturday, May 28, 2011
It all started with John Bird a.k.a. Waldo Mushman, one of the most vocal figures in the growing circle of short sellers targeting Chinese stocks. In early August of 2009 Bird proclaimed the TCM (Traditional Chinese Medicines) company China Sky One Medical (CSKI) a fraud: "Based on the massively inflated and inconsistent numbers, I have come to believe that China Sky One Medical is actively committing fraud." Over the next 12 months, Bird reiterated his call numerous times, on any platform or message board he found his way to.
The company responded with press releases and denied all allegations. In one of those attempts (July 23, 2010) "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." It did not help them. The stock lost 81.63% of its value since John Bird's initial call, so we can safely assume that he made a good chunk of money with his short position.
Bird got help from other short sellers. On February 21, 2010, Manuel Asensio accused CSKI on Seeking Alpha of not disclosing material information: "The Chinese government order to stop selling eight of CSKI's products seems to be material to CSKI's operating condition, yet CSKI has provided no disclosure of the order to U.S. investors." In a similar vein, The Financial Investigator blogged on August 4, 2010, that "China Sky One did not disclose the receipt of its own subpoena in its filings nor did it reference that its auditors had received one." At that time the Securities and Exchange Commission had issued subpoenas to China Sky One Medical and its auditors, MSPC. And roughly one month later, The Street Sweeper published on its website that "MSPC is a past target of securities regulators that has since come under fire for allegedly approving flawed financial reports issued by CSKI itself."
China Sky One is still trading on Nasdaq at the time of writing. Yet the stock price is in a constant decline. From $22.75 at the end of 2009, the stock closed at $6.97 one year later, and now you can buy it for just $2.83. At Friday's close, CSKI is down 59.40% for the year.
The next target on our list of short attacks is L&L Energy (LLEN), a U.S.-based coal mining company with the majority of its operations in China. On January 11, 2010, The Street Sweeper portrayed LLEN as a "relatively new Chinese coal miner accused of misleading investors in the past, [that] has managed to become a stock-market winner by posting some of the most incredible numbers recorded in the entire industry."
The stock kept rising into summer until Herb Greenberg used his platform on CNBC to repeatedly attack the company and its Chief Executive Officer: "CEO and founder Dickson Lee was fined $65,000 by FINRA and banned from the securities industry for a year." Greenberg's attacks on live television sent the stock lower. From $11.05 at the time of the first broadcast (December 21, 2010), LLEN dropped 44.53% to close at $6.13 last Friday. The stock is down 43.25% for the year, but it has recovered some from its all-time lows, printed in early April at $4.29.
On January 26, 2010, a short-selling outfit named "Worthless Pennies" called out pharmaceutical company China Biologic Products (CBPO). "The urgent warning we have for investors today is that the background check and evidence we collected clearly prove direct ties between CBPO management/directors and convicted criminals who exercise control of the company, a criminal background of the CEO of its operating subsidiary and a history of laundering money stolen from investors, none of which the company disclosed in its filings." That call was initially very successful and sent CBPO 25.94% lower on the day of its release.
China Biologic reacted three weeks later by announcing a thorough internal investigation and stating that "the Company believes that this is an attempt to discredit the Company's management and disrupt the Company's business and operations." In December 2010 the company informed investors that "the Special Committee of its Board of Directors has completed its investigation of several allegations that appeared on certain financial websites in January 2010." CBPO's strategy was highly successful as the stock has more than doubled since the Special Committee was formed on February 17, 2010. It moved from $7.62 to $16.10 for a gain of 111.28%, and CBPO is one of the very few Chinese reverse mergers the market has not punished yet - the stock has gained 33.27% since the beginning of 2010, while most of its RTO peers have been thrown into the stock dumpster. The "Worthless Pennies" outfit seems to have closed its doors, and its website does no longer exist.
Citron Research's first target in the China small caps universe was newly uplisted SinoCoking Coal and Coke Chemical Industries (SCOK) on March 11, 2010. Citron called it "an ugly duckling Chinese coal deal with an utterly improbably rise and ridiculously unsustainable run-up." The stock was subsequently destroyed, dropping from $34.09 at the time of Citron's report to $5.93 last Friday, a loss of 82.61%.
Another attack on SCOK was launched by Sharesleuth on September 13, 2010. The author, Chris Carey, wrote "that no fewer than eight people who participated in [SinoCoking's share] placement have been the subject of Securities and Exchange Commission actions or criminal prosecutions." The stock is down 50.46% year-to-date and fails the Trading China Safety/Risk Model with an "Extreme Risk" score.
Lihua International (LIWA), a company that sells wire produced from refined scrap copper, was repeatedly a short seller target. On May 9, 2010, Seeking Alpha published a Steven R. Chapski article stating that "in order for the SEC financial statements to be correct, LIWA paid the Chinese government $4 million for income taxes in 2009, yet reported $0 in profit tax to the same Chinese government on their SAIC financial reports." The company responded two weeks later by providing its most recent SAIC documents on its website and "proving" that these results were consistent with those reported in the company's SEC filings.
Chapski didn't back off, though. In December he posted another article, insisting that in his belief "the SEC financial statements continue to be wrong." None of those reports had any permanent effect on LIWA's stock price. The stock closed 2010 with a 7.5% gain, and has only recently come under pressure, consistent with its Chinese reverse merger peers. For the year of 2011, LIWA is now down 33.9%, and the stock's short ratio has spiked to 25.65% of the float.
To be continued...