Lihua Falls a Record 22% Following Short Seller’s Allegations

Lihua International Inc., a Chinese producer of copper wire, fell a record 22 percent in the U.S. after a short seller said the company misrepresented itself to investors.

Lihua, based in Danyang, China, dropped after Absaroka Capital Management LLC, a Cheyenne, Wyoming-based hedge fund, said in a report that concerns include “illogical financial results” and deals with Danyang Huaying Resource Recycling Ltd., which is majority owned by Chief Operating Officer Wang Yaying. Lihua’s management has engaged in “excessive stock promotion,” and the shares should be valued at $3, Absaroka’s Kevin Barnes wrote in the note.

The stock, which began trading in the U.S. in September 2009, fell 11 percent to $6.02 at 4 p.m. after plunging as much as 22 percent earlier. The decline pushed Lihua’s market value to $180.8 million from $202.7 million yesterday, and extended the year-to-date retreat to 46 percent.

Daphne Huang, Lihua’s New York-based head of corporate finance and investor relations, said the company plans to respond to Absaroka’s report as soon as possible.

“Lihua is a real business,” she said in a telephone interview. “These allegations are pretty baseless.”

U.S.-traded Chinese companies such as China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations this year, raising concern there may be widespread fraud. Carson Block, a short seller at Muddy Waters LLC, helped fuel that speculation with his bearish reports on corporations including Sino-Forest Corp., which trades in Canada.

Short selling, or selling borrowed shares with the hope of profiting when they fall, amounted to 5.3 percent of Lihua’s outstanding shares as of July 28, according to Data Explorers, a New York-based research firm. That compares with a record 9.1 percent on April 13.

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