China Shorts Under Fire as Chinese Companies Sue Anonymous ‘Arthur Little’
Deer Consumer Products Inc. (DEER) and Sino Clean Energy Inc. (SCEI), U.S.-listed Chinese companies battered by fraud allegations in online reports, are blaming their big share slides on a blogger who uses the pseudonym Alfred Little.
The two firms have filed defamation lawsuits in New York against “Little” and websites that published his blogs. The cases are the most significant efforts by Chinese companies that trade on U.S. exchanges to fight back against bloggers and short sellers who have questioned their accounting practices.
“There’s no question there is some fraud in China, but some bloggers are taking advantage of the perception that it’s widespread,” said David Feldman, a lawyer at Richardson & Patel LP in New York, which has worked for Chinese companies listed on U.S. exchanges including Sino Clean Energy. “The folks who are making stuff up to drive a stock down, that is criminal, and the companies have to defend themselves.”
Deer, a Shenzhen, China-based maker of small kitchen appliances, was the subject of a March 14 report on AlfredLittle.com saying the firm had inflated sales and margins and overpaid for property purchases to benefit executives. Shares on the Nasdaq Stock Exchange have fallen 41 percent since a version of the report was posted March 17 on Seeking Alpha, an investing website also named in the suit.
Sino Clean Energy, a Xi’an, China-based maker of coal-water slurry fuel, was attacked in an April 26 report by GeoInvesting LLC, which invests in Chinese stocks and operates a website featuring its own research as well as comments by bloggers. It was followed two days later by a posting on Alfredlittle.com and Seeking Alpha titled, “Sino Clean Energy Is a Complete Hoax and Its Shares Are Worthless.” The stock, traded on Nasdaq, has fallen 49 percent since the GeoInvesting report.
Both Alfred Little and Skippack, Pennsylvania-based GeoInvesting said in their reports that they sent investigators to Sino Clean Energy factories in China. Little, identified at the time on the blog as a Shanghai-based investor with more than 35 years’ experience, said in the April 28 post that four months of video surveillance of those plants revealed “no meaningful production.” GeoInvesting said its investigators observed fewer employees and shipments than Sino Clean Energy claimed. At one factory, it found what it said was evidence of one production line, not the three the company said it had.
Alfred Little’s Deer report said a survey of 60 stores that sell the company’s products found evidence of “terrible sales volumes.”
‘False and Defamatory’
Deer filed a lawsuit in New York state court in Manhattan on March 28 against Alfred Little and Seeking Alpha, saying they distributed “false and defamatory reports.” The company said two Chinese officials cited by Little don’t exist at the “relevant government agency” and that statements about overpaying for real estate and misappropriating funds were “fear-mongering.”
Sino Clean Energy sued Little, GeoInvesting and Seeking Alpha on May 9, also in New York state court, alleging fraud, defamation and interference with its business. It said that Little had manipulated the market by publishing reports “riddled with falsehoods” and “outright lies.”
Robert Knuts, a partner at Park & Jensen LLP in New York and a former senior enforcement attorney at the U.S. Securities and Exchange Commission who is representing Deer, declined to comment. Eugene Licker and Mitchell Nussbaum, partners at Loeb & Loeb LLP in New York who represent Sino Clean Energy, also wouldn’t comment. Executives at the two companies didn’t respond to e-mails seeking comment.
‘Flavor du Jour’
Sino-Forest Corp. (SNOFF), an operator of tree farms in China, saw its shares plunge 71 percent in two days last week after a report by short-seller Carson Block’s Muddy Waters Research. The company posted documents on its website yesterday which it said refuted some allegations it had overstated timberland holdings and production. It called Block’s report “defamatory” and said it is “considering its legal remedies.”
Suits against short sellers, who sell borrowed shares with the hope of profiting when they fall, are rare, difficult to win and can backfire on companies that bring them, said Adam Pritchard, a professor at the University of Michigan Law School in Ann Arbor.
“I’ve seen it before, people complaining about the short sellers -- the Chinese are just the flavor du jour,” said Pritchard, who specializes in corporate and securities law. “They bring these suits and then quietly let them drop. You would look hard to find a verdict in favor of the company.”
Lawyers for Deer and Sino Clean Energy face the added challenge of finding out who Alfred Little is. Knuts said in his complaint that Deer has been unable to locate the author of the blogs and that Alfred Little “may be a pseudonym” for a group of short sellers “engaged in market manipulation.” Deer was granted permission by a judge last month to serve subpoenas for documents by e-mail until it learns Little’s identity.
An individual who identified himself in an e-mail to Bloomberg News as the managing editor of the website Alfredlittle.com and who declined to give his name said “Alfred Little” is a “cover for a group of investors and research analysts, most of whom are Chinese, who are making money exposing fraud in Chinese U.S.-listed companies.”
None of the members hold securities licenses in the U.S., are U.S. citizens, or would reveal their names, the person wrote.
‘Alfred the Great’
The website was founded by a Chinese investor known as “Alfred the Great,” since retired, and has evolved into its current form, the person who claimed to be the managing editor said. The site was updated on June 3 to say it is “primarily supported by the efforts of analysts and investors based in China” and that articles from others are welcomed.
“The quality of the research will make it legitimate,” he said in the e-mail. “No one will care in another month why the site refuses to share the name and ID of the researcher who visited Deer’s site. The evidence will stand on its own feet.”
Alfred Little began publishing reports about Chinese companies last year, including China Green Agriculture Inc. (CGA), a Xi’an-based fertilizer maker, and Rino International Corp. (RINO), a supplier of water-treatment equipment in Dalian, China. China Green revealed an informal inquiry by the SEC in January, without saying what it was about, and the shares are down 53 percent since the beginning of September. The SEC suspended trading in Rino in April because of questions about the accuracy of public filings, the existence of some customer contracts and the size of its operations.
Dan David, vice president of GeoInvesting, said his company hasn’t been served a copy of the complaint. He said he stands by the report published by GeoInvesting, which holds both long and short positions in the shares of Chinese companies listed in the U.S. markets.
“If we’re served with a lawsuit, we will counter-claim against Sino and their advisers,” David said.
Seeking Alpha declined to comment about the lawsuit, Rebecca Barnett, who identified herself as a member of the website’s editorial team, said in an e-mail.
The SEC has revoked the registrations of at least eight Chinese companies since December, and more than 24 firms have disclosed auditor resignations or accounting flaws to the agency since March, Mary Schapiro, the commission’s chairman, wrote in an April 27 letter. U.S. exchanges have frozen or delisted shares of more than a dozen China-based firms since March.
Regulators have focused mainly on Chinese companies that obtained listings through reverse mergers -- transactions in which a closely held firm acquires one that’s publicly traded and becomes able to sell shares without the scrutiny of an initial public offering. A Bloomberg index of 78 such Chinese companies has slid 42 percent this year.
Deer and Sino Clean Energy, which both used reverse mergers, have been sued by investors in actions handled by the Rosen Law Firm PA in New York that cite Alfred Little reports. The suit against Deer, filed on April 29 in federal court in Los Angeles, says the company misrepresented its financial performance and business prospects. The Sino Clean Energy action, filed in federal court in Los Angeles on May 6, alleges that the company issued materially inaccurate financial statements.
The two firms are among at least 20 U.S.-listed Chinese companies targeted by lawsuits filed this year, according to the Stanford Law School Securities Class Action Clearinghouse.
Deer said in a statement May 2 that the shareholder lawsuit was further evidence of “attempted manipulation” and that it will seek sanctions against the law firm if the complaint isn’t withdrawn. Sino Clean Energy said in a quarterly report filed last month that the shareholder suit is “without merit.”
The company also announced a “special dividend” on May 25, granting shareholders the right to a portion of any judgment or settlement of its case against Little and the websites.
“At this point, the whole China space is being attacked,” said Richard Anslow, a partner in New York-based Anslow & Jaclin LLP who works with Chinese companies on U.S. listings. “This isn’t a bad thing if it flushes out the bad companies, because there are some very good companies out there being hurt. This could ultimately help the industry, but only if the bloggers aren’t committing fraud themselves.”
Ren Baowen, chairman and chief executive officer of Sino Clean Energy, responded to the reports with a barrage of information intended to show the bloggers were wrong.
Video posted on Alfredlittle.com purporting to demonstrate that one factory had almost no production was of a construction site behind the plant, Ren said in a May 3 letter to shareholders. Most of Sino Clean Energy’s production and shipping is done from 4 p.m. to 8 a.m. because electricity is one-third the cost at night, and daytime surveillance would miss the busiest time, he said.
The company also posted documents on its website to show it was shipping large volumes of coal-water slurry, a fuel made of fine coal particles suspended in water, as well as transcripts of conversations with meteorologists to prove Sino Clean Energy videos were taken on the days the company claimed.
“Our business remains sound,” Ren said in his letter.
Two phone numbers listed on the website of Shenyang City Xinyu Transportation Co., one of the trucking firms Sino Clean Energy said it used, were disconnected. Local phone directories showed no phone number listed for another trucker, Xi’an Kaifeng Transportation Co.
Joseph Levinson, chairman of Sino Clean Energy’s audit committee, resigned on May 16, two weeks after Ren’s letter was released and less than three weeks after he joined the board, according to company filings. Levinson, in a one-sentence resignation letter, gave no reason for his departure. He didn’t respond to an e-mail seeking comment.
Nussbaum, one of the lawyers representing Sino Clean Energy, wrote on April 21 in the Daily Deal, an industry newsletter, that companies won’t list in the U.S. if the SEC fails to pursue bloggers who file false reports.
“Currently there is no enforcement by U.S. regulators to ensure the information in these research reports is accurate,” Nussbaum wrote. “What is needed are more modern regulatory practices to deal with these issues rather than scare these companies away.”
The agency has legal grounds to sue the authors if the reports are inaccurate, said Thomas Newkirk, a former associate director of the SEC’s enforcement division and now a partner at Jenner & Block LLP in Washington.
“If they know the information is false, that’s a classic rule 10B-5 violation,” Newkirk said, referring to the SEC rule prohibiting securities fraud, including share manipulation.
John Nester, a spokesman for the SEC, declined to comment about any specific cases.
The use of pseudonyms makes it harder to determine which side is telling the truth, said Anslow, the lawyer who has worked on Chinese listings. It also increases suspicions about the motives of bloggers, a person calling himself “Arthur Big” wrote on the website Hit Piece Research.
“Why would someone hide under a false identity and deny that they actually exist?” the person, who described himself as a semi-retired market-investigations consultant, wrote. “Well, our belief is because they are consistently breaking the law and their credentials are fabricated to be stronger than stated. In short, they do it to profit at the expense of the average shareholder.”
The person claiming to be the managing editor of the Alfred Little website said anonymity was essential for safety because the people writing for the blog live in China.
“Some of the companies targeted have strong police connections and can track down researchers using their ID numbers,” he wrote. “If we lose anonymity, we lose the war.”