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Muddy Waters Target Orient Urges Action as Shares Languish

Muddy Waters Research Director Carson Block
Carson Block, Muddy Waters Research founder. Source: Bloomberg Televison via Bloomberg

June 21 (Bloomberg) -- Orient Paper Inc., a target of short-seller Muddy Waters LLC last year, urged overseas-listed Chinese companies to increase transparency after its shares fell 60 percent following the critical report.

After the Muddy Waters June 28 analysis that labeled Orient a fraud, the company appointed Loeb & Loeb LLP, Deloitte & Touche Financial Advisory Services and TransAsia Layers to probe the allegations. That four-month investigation found no evidence to support the short-seller’s claims.

Chinese companies “should conduct the third-party independent investigation like we did, they should do it even better than us in order to shut others’ mouths,” Liu Zhenyong, Chairman and Chief Executive Officer of Baoding, Hebei-based Orient Paper, said yesterday in a phone interview. Liu said he may consider taking legal action against Muddy Waters.

Regulators and investors have increased scrutiny of Chinese companies amid accounting allegations. Sino-Forest Corp., a Chinese tree-plantation owner, plunged 85 percent in two weeks since Muddy Waters, an investment firm run by Carson Block that’s betting against the stock, said the forestry company overstated its timber holdings. Paulson & Co, its biggest shareholder, said in a filing yesterday that it sold all of its 34.7 million shares.

Muddy Waters said in its 2010 report that Orient Paper overstated its 2008 revenue by 27 times and assets by at least 10 times and misappropriated about $30 million. Since then, Orient Paper shares have dropped to a year-low of $3.31, down 78 percent from its high in January 2010. Block put a “strong sell” rating on the stock in his original report with a target price of less than $1.

“The market clearly doesn’t believe Orient Paper,” Block said in an e-mailed response to questions last night. “Orient Paper never addressed many of our allegations, and it took months to address the few that it did.”

‘Prove We Are Clean’

Liu, the biggest shareholder with 28 percent, according to data compiled by Bloomberg, said in the interview he is “worried investors have lost their confidence as share prices are falling.”

Chinese stocks listed in the U.S. have fallen 48 percent this year, according to the Bloomberg Chinese Reverse Mergers Index of 78 companies. Shanghai-based ShengdaTech Inc. has fallen the most, down 94 percent, after it set up a committee on March 15 to investigate “potentially serious discrepancies and unexplained issues” in its financial records.

Block made money as the stock fell because he had a short position, as disclosed in the report. Short selling is the sale of borrowed shares with the hope of profiting when they fall.

No Contact

Orient Paper has not been in contact with Block since after the report was published and he responded to an email, Orient Paper Chief Financial Officer Winston Yen said in an interview.

“Even after the independent investigation, he has never tried to contact us to ask about it,” Yen said.

The company will start a 360,000-metric-ton-a-year production line this year to boost capacity of packaging paper and other products to 600,000 tons, Liu said. The line was delayed because of the Muddy Waters report, he said.

Muddy Waters said in a June 2 report that Sino-Forest was a “fraud” and overstated its concessions in China. Sino-Forest has established an independent committee to investigate the allegations and appointed PricewaterhouseCoopers LLP to assist. The company says the report is “inaccurate, spurious and defamatory.”

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at

To contact the editor responsible for this story: Andrew Hobbs at

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