On Nov. 12 Equities covered major American stock scams perpetuated on either the NYSE or NASDAQ. Today, we wanted to explore a specific subset of fraud stocks: those targeted by short-sellers.
As Equities Michael Teague argued, short sellers – or traders that bet that a stock’s value will drop – serve an important function by routing out fraud stocks. Perhaps the biggest instance of a “short seller does good” is probably Jim Chanos uncovering Enron’s massive accounting scam and subsequently taking a short position on them. Of course, Chanos was right, and he made a fortune. But more than his own personal gains, Chanos was one of the first to reveal to the public at large that one of the most celebrated companies on Wall Street was a house of cards.
Chanos, and his short sell research contemporaries, are on the constant lookout for fraud companies, and tend to be the first to discover when a company is engaging in fishy accounting, fabricating reports, or otherwise trying to pull the wool over the eyes of the investing public. Since the days of Enron, short-sellers have a very specific place they’re looking for companies that, if not of the same size and scope of Enron, are engaging in the exact same kind of fraud.
They’re looking to China.
Citing the country’s somewhat opaque accounting practices that make international scams easier to perpetuate, short-sellers have been targeting Chinese companies at a drastic clip. There are roughly 175 Chinese companies currently trading on the NYSE or NASDAQ. Of those 111 meet the definition of microcap, or possessing a valuation less than $300 million USD. And what do short sellers have to say about Chinese microcap stocks?
Five percent of Chinese microcap stocks currently trading on the NYSE or NASDAQ have been accused by a major American short seller of defrauding shareholders.
While 2011 represented the (to this point) highest incidence of Chinese fraud allegations, as we’ll see, to short-sellers Chinese fraud is far from a thing of the past. Even Chanos, possibly the biggest name in short selling, has said the entire Chinese economy is “on an economic treadmill to hell.”
Here are the Chinese companies currently trading on the NYSE or NASDAQ that have been accused of fraud by notable short sell analysts:
Sino Clean Energy (SCEI)
In 2011 famous short seller Alfred Little alleged that this energy company said this company “is the most outrageous Chinese fraud to date committed against U.S. investors” and said its shares were worthless. Alfred Little provided surveillance footage of the copmpany’s three plants they claimed proved that output from the company was being wildly overstated. The company’s stock has dropped over 80 percent since Alfred Little’s allegations became public.
Orient Paper (ONP)
Famous short seller Muddy Waters targeted this company back in 2010, calling them “virtually worthless.” While the company is still afloat, Orient Paper has lost 32 percent of its market valuation in the last two years.
China New Borun (BORN)
First targeted by Citron Research in 2010, corn distiller China New Borun has come under renewed scrutiny in 2013 amid a series of unexplained stock pops. China New Borun is currently up on the year, but down nearly 43 percent from its price two years ago.
NQ Mobile (NQ)
Muddy Waters might not target Chinese companies with the zeal they once did, but that didn’t stop them for going after mobile company NQ née Netquin Mobil in Oct. 2013, saying their user base was largely fabricated and revenues grossly overstated. Thought they vehemently deny the allegations, NQ has tanked since the reports first came out.
Suntech was once the largest solar company in the world. But when hidden debts began to surface, Suntech began liquidating assets at a rapid rate, and was unable to avoid default on half billion USD loan. It looks to soon go belly up in a massive reversal of fortune.