March 30 (Bloomberg) -- Gene Michael Bennett, a director for at least four Chinese companies trading in the U.S., has come under the scrutiny of a short seller who says he’s not what he claims.
Absaroka Capital Management LLC posted a letter on its website last week saying Bennett didn’t work for the accounting firm listed in his biography, has no law degree from the University of Michigan and fails to comply with rules of the audit committee he leads at China Shen Zhou Mining & Resources Inc. Bennett, who hasn’t been accused of anything by regulators, says he’s done nothing wrong and blamed some of the confusion about his background on misperceptions.
Absaroka is part of a growing group of investment firms discovering inconsistencies at Chinese companies that started trading in the U.S. through takeovers, and that are trying to profit from their decline. Transactions called reverse mergers have given hundreds of Chinese corporations access to the world’s largest capital market, avoiding the scrutiny of initial public offerings as hunger grows for investments in an economy that became larger than Japan’s last year.
“Bennett was part of the reason why we initially got concerned about China Shen Zhou,” said Kevin Barnes, an analyst at Cheyenne, Wyoming-based Absaroka. “We don’t understand how he can have this track record and still be on the board. We would expect a candidate with a higher duty of care for public shareholders to be the audit committee chairman.”
Beijing-based China Shen Zhou, the most-shorted stock on the NYSE Amex exchange, is among at least 370 reverse merger companies that obtained U.S. listings since 2004, according to DealFlow Media Inc., a research firm based in Woodbury, New York. In a reverse merger, a closely held corporation buys a public shell company and retains the U.S. listing.
The Securities and Exchange Commission set up a task force to look for fraud in overseas companies with listings on U.S. exchanges, with particular interest in Chinese reverse mergers, and began a probe last year asking auditors for information on the firms. China Green Agriculture Inc., based in Xi’an, and Rino International Corp., a Dalian-based maker of water-treatment equipment, have been the subjects of inquiries from the agency.
Almost $4 billion of value has been erased from 80 of the biggest exchange-listed companies after they reached their 2011 peak of about $18.6 billion in January, Bloomberg data show.
Bennett, 63, runs a nongovernmental organization called American General Business Association in Beijing that helps Chinese companies develop business overseas. He’s served on the boards of at least six Chinese companies listed on U.S. exchanges since 2007, according to company documents and data compiled by Bloomberg. He was paid more than $300,000 during 2008 and 2009 by seven companies, according to regulatory filings. That includes at least $190,000 for his work at the four firms which are or have been under scrutiny.
At Beijing-based Duoyuan Printing Inc., now the target of an SEC investigation, Bennett served as audit committee chair between April and July 2007 and as CFO until December 2007. The company was known as Asian Financial Inc. at the time. He has been a director since October 2008 at China Agritech Inc., a Beijing company that fired its auditor this month and began an investigation into “allegations made by third parties” that it didn’t specify.
Bennett was a director and on the audit committee of Kunming-based China Shenghuo Pharmaceutical Holdings Inc. from June 2007 to October 2008. China Shenghuo paid $200,000 to settle, without admitting wrongdoing, a shareholder lawsuit alleging it misled investors.
He has been a director of China Pharma Holdings Inc. since February 2008. Bennett was named chairman of the audit committee for China Fire & Security Group Inc. in April 2007, and left the board in September 2008. He was CFO of China Architectural Engineering Inc. from November 2009 to September 2010. The company has changed its name to China CGame Inc. He became chairman of the audit committee and member of the compensation committee at Shenzhen-based Global Pharm Holdings Group Inc. in February this year.
Bennett, who has been a China Shen Zhou director since November 2007, said he plans to keep his role. The company has a stock-market value of $151.6 million, down from a peak of $286.5 million on Jan. 5. Short sales amounted to 62 percent of shares available for trading as of March 15, making it the most-shorted stock listed on NYSE Amex, according to exchange data.
“I have done nothing wrong, and I do not believe the company has either,” he said in an e-mail on March 23.
China Shen Zhou, which said in its 2010 annual report that it mines, processes and distributes fluorite, copper, zinc and lead, fell 22 percent on March 9 after Absaroka said the company exaggerated the size of its mines and raised other issues. The hedge fund said Bennett lied about his employment history by saying he worked for accounting firm Grant Thornton LLP, overstated his educational background in a regulatory filing and failed to convene enough audit committee meetings.
Bennett said in an e-mail that he worked for Gerbel & Butzbaugh, and when he left Gerbel, it was negotiating to merge with a firm that later became Grant Thornton, whose clients include the U.S. government and more than half the companies in the 30-stock Dow Jones Industrial Average, according to its website. China Shen Zhou said in an Oct. 12 filing that Bennett has “experience working for one of the top auditors in the world, Grant Thornton.”
Gerbel & Butzbaugh is now called Gerbel & Co., which is based in St. Joseph, Michigan. While Bennett did work for Gerbel, the company never negotiated to merge with Grant Thornton or its predecessor, said Marcia Graham, firm administrator at Gerbel who says she’s worked there for 41 years. Kristi Grgeta, a Grant Thornton spokeswoman, was unable to confirm any relationship with Gerbel.
“When I left Gerbel & Butzbaugh, they were negotiating with Alex Grant to merge,” Bennett said in an e-mail. “That was over 30 years ago. To clarify in the future all references will be to Gerbel & Butzbaugh CPAs as employer.”
No Law Degree
A China Fire & Security document filed with the SEC on Aug. 9, 2007, said Bennett received a law degree from the University of Michigan. Annual reports for 2008 and 2009 from China Pharma Holdings say he graduated from “Michigan University.” A press release from L&L Financial Holdings Inc. in February 2008 announcing Bennett’s appointment as CFO said he took law classes at the University of Michigan. Bennett resigned from L&L on May 6, 2008, to focus on studying for his doctorate in Hong Kong, according to a company filing. The Seattle-based company has renamed itself L&L Energy Inc. A telephone message left before regular business hours in Seattle for L&L Energy Chief Executive Officer Dickson Lee was not returned.
David Baum, assistant dean at the law school, said in an e-mail that he found no records of Bennett taking classes there.
Bennett said in a March 24 e-mail that he doesn’t have a law degree from the University of Michigan and never enrolled. He said he committed an “error in not correcting a misconception.” Bennett has an undergraduate degree and master’s degree in business administration from Michigan State University, a separate school, according to data compiled by the National Student Clearinghouse.
China Shen Zhou’s audit committee met twice in 2008 and three times in both 2009 and 2010, according to filings. The company’s bylaws say the group must meet at least four times a year and more when circumstances require.
Bennett said there were frequent meetings by telephone and in person with management and other board members, adding that, “in the future all such meetings will be more formalized.”
China Shen Zhou didn’t respond to requests for comment, including a message left with an office receptionist and two e-mails. There was no response to messages left for three investor relations contacts in the U.S.
Eighty reverse merger companies tracked by Bloomberg surged 239 percent as a group between the Standard & Poor’s 500 Index’s 12-year low on March 9, 2009, and Jan. 11, 2010, when their total value reached about $24.5 billion. They have fallen 40 percent since that peak 14 months ago and 21 percent since their 2011 high on Jan. 12, the data show.
Among the 80 companies, about 9 percent of shares available for trading have been sold short, compared with 3.7 percent in the S&P 500, data compiled by Bloomberg show. The index includes companies that, as of January, had a minimum market value of $50 million, traded more than 50,000 shares a day, and were listed by the New York Stock Exchange, NYSE Amex or Nasdaq Stock Market. None had IPOs.
“We are continuing to look at foreign-controlled U.S. companies and the intermediaries who bring them to market, including repeat players,” said John Nester, an SEC spokesman.
Absaroka, a hedge fund that aims to make money when stocks rise or fall, declined to disclose the size of its bet against China Shen Zhou. Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
Assessing the quality of company directors is an important piece of due diligence, according to Kevin Pollack, a money manager at New York-based Paragon Capital LP who invests in reverse-merger companies.
“In every investment market, there are a small number of bad apples that can raise a red flag, such as low quality directors and promoters,” Pollack said.
The Washington-based Public Company Accounting Oversight Board said in a March 15 report that it found “potential audit concerns” -- including language barriers and overreliance on outside consultants -- for firms that sign off on statements for companies in China. The report focused on corporations that listed on U.S. exchanges using reverse mergers.
The wave has coincided with increased investment in Chinese securities. Investors added a net $1.64 billion to the iShares FTSE China 25 Index Fund in the past three years, according to New York-based research firm XTF Inc. That’s the fourth-largest inflow among 96 ETFs tracking countries, excluding the U.S.
Duoyuan plunged 55 percent on Sept. 13 after the maker of printing equipment dismissed auditor Deloitte Touche Tohmatsu CPA Ltd. The SEC is investigating Duoyuan for possible fraud in the sale of securities, a probe that the company is cooperating with, according to a March 18 statement. Duoyuan hasn’t filed an annual report for the year ended June 30, or quarterly reports for the periods ended Sept. 30 or Dec. 31.
Bennett is a member of a special committee formed by China Agritech this month, which the company said on March 13 will “investigate certain allegations made by third parties.” The next day, China Agritech announced that it fired its auditor, Ernst & Young Hua Ming.
He resigned from the board and audit committee of China Shenghuo on Oct. 23, 2008, saying the company lacked good corporate governance measures.
“To be clear I do not feel the firm is fraudulent in actions, nor purposely breaking rules and regulations, but they are uneducated and seemingly unwilling to be educated on what is necessary to be a good member of Amex or any other credible market,” he wrote in a letter to the board.