Muddy Waters Claims on China Companies Have Yet to Be Proven, Arbess Says
Assertions by short seller Carson Block that Sino-Forest Corp. (TRE) and Focus Media Holding Ltd. (FMCN) lied about their businesses have yet to be proven, said Daniel Arbess, manager of Perella Weinberg Partners LP’s Xerion funds.
“The jury is out as to whether something like Sino-Forest or something like Focus Media is a total fraud,” Arbess said at the Bloomberg Hedge Funds Summit in New York, where Block was a guest. “Carson better be right on these things, because if he isn’t, then he will have to do something else.”
Sino-Forest fell 74 percent from June through August after Block said the Ontario- and Hong Kong-based timber owner overstated the value of its assets. Focus Media lost 39 percent on Nov. 21 after Block’s Muddy Waters LLC said the Shanghai- based company overstated its ad network and the value of acquisitions. The shares have rebounded 20 percent through yesterday.
Focus Media denied Block’s assertions in a Nov. 22 statement and on a conference call with analysts, saying the report reflects a misunderstanding of its business. Justin Martin, who succeeded Sino-Forest Chief Executive Officer Allen Chan in August, said Nov. 15 that an investigation by an independent committee showed Sino-Forest isn’t a “Ponzi scheme.”
Misrepresentations are a pervasive problem among public companies in emerging markets, including some that listed in the U.S. through reverse mergers and initial public offerings, Block said today. In a reverse merger, a closely held firm buys a publicly traded shell company and retains its listing.
‘Bent’ Rules
“When you’re dealing with emerging markets’ company senior management you’re talking about people who have bent rules,” Block said.
Chinese stocks trading in the U.S. have faced investor scrutiny this year after companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations. More than 35 non-U.S. companies had their trading halted on American exchanges because of inaccurate financial statements and other issues, according to the U.S. Securities and Exchange Commission.
Focus Media is the seventh company targeted by Muddy Waters and the second-largest by market value behind Sino-Forest.
“I’m far from an apologist for Chinese issuers -- I think the whole space is very, very dangerous,” New York-based Arbess said. “I’m just saying I don’t know you can draw a conclusion that says the whole space is structurally corrupted.”
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net;
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