A Wall Street Scion's Expensive Education

When Jesse Glickenhaus joined his family's New York asset-management company in October, he wanted to bring its stockpicking into the era of global warming. That's what led him to make a $4 million investment in China Agritech (CAGC), a Beijing-based producer of organic fertilizer listed on the Nasdaq Stock Market (NDAQ) and 22 percent-owned by Carlyle Group. It was, Glickenhaus says, a way to profit from the need to feed China in an environmentally responsible way.

Or so it seemed. The same week in November that Glickenhaus & Co., which has $1.3 billion under management, bought most of its shares—about a 2 percent stake in the company—China Agritech replaced its auditor. Three months later, investors who had bet against China Agritech's stock attacked the firm as a scam with no real operations. Shares tumbled to $6.88 on Mar. 14, when trading was halted for failure to file financial data, from $15.87 on Nov. 8, giving Glickenhaus & Co. a $1.8 million paper loss based on what it says was an average purchase price of $12.37. "It's not nothing, but it's not a big deal for us financially," says Glickenhaus, dressed in frayed khakis and a rumpled shirt, in the company's midtown Manhattan office. "The real reason we're fighting is because we believe someone blatantly lied to short the stock."

For Glickenhaus, 29, who has a master's degree in global affairs from New York University, it was a quick education in reverse mergers by foreign companies, such as the one executed by China Agritech in 2005. The experience has vexed his grandfather, Seth Glickenhaus, 97, who founded his first company in 1938 and still comes to the office most days. The elder Glickenhaus says he has "certainly never run into a problem like this."

In a reverse merger, a closely held corporation buys a publicly traded shell company and retains its U.S. listing. China Agritech came into being after China Tailong Holdings, a fertilizer maker, merged in 2005 with Basic Empire, a shell company that began life in Nevada in 1925 as Argyle Mining and no longer had any business operations, according to a China Agritech filing.

Companies that list on U.S. markets through reverse mergers aren't subject to the same scrutiny from regulators and investors as those that make initial public offerings, Luis A. Aguilar, a commissioner at the U.S. Securities and Exchange Commission, said in an Apr. 4 speech. More than 600 such "backdoor registrations" have been done since 2007, including about 150 by companies based in China, and a "growing number" of those "are proving to have significant accounting deficiencies," he said. Glickenhaus says he didn't check how China Agritech obtained its U.S. listing and focused instead on the fundamentals of the company.

The SEC has set up a task force to look for fraud in reverse-merger companies and began a probe last year asking auditors for information. China Agritech hasn't disclosed whether it's a target, and Shiwei Yin, an executive at Grayling, the company's investor-relations firm, declined to comment. John Nester, an SEC spokesman, says the agency neither confirms nor denies investigations.

On Feb. 3 a report titled "China Agritech: A Scam" was published on the website of Lucas McGee Research. The 16-page paper, whose authors were identified only as holders of short positions, or bets against the company, said China Agritech "has no valuable technology, intellectual property, customer relationships, or capital assets." Site visits to company facilities "found each one empty, idle and without production equipment," the paper said, with the exception of one plant in Beijing. Financial data supplied to Chinese regulators and obtained by "legal agents" who weren't identified showed that China Agritech had 2009 revenue of $7.6 million. While the company said it had almost $46 million of cash on its books and unaudited 2010 revenue of $119 million, the report concluded that revenue last year couldn't have exceeded $7.5 million. The report ricocheted on blogs and was cited by Bloomberg News. China Agritech shares fell 9 percent on Feb. 3.

Jesse Glickenhaus decided to see for himself. He flew to China on Mar. 4 and visited several plants and retail outlets. He posted his report on his firm's website on Mar. 24 and a video on YouTube (GOOG) showing busy factories to refute short sellers whom he accused of being "negligent in their disregard for the truth."

That led only to further attacks. John Hempton, chief investment officer of Bronte Capital, a Sydney-based fund manager who had a short position in China Agritech, wrote in blog posts that Glickenhaus had been duped. The New York investor was taken to a state-owned fertilizer-bagging plant at an address different from that listed in China Agritech filings, according to Hempton. "I had a lawyer resident in Shanghai stake out their facilities," Hempton says. "There was no evidence of operations." Glickenhaus says he arranged his trip through China Agritech and didn't speak with any customers or contact the firm's banks.

At a China Agritech factory in the Pinggu district of Beijing, a two-story building about the size of two football fields with the company's name displayed outside, Bloomberg News observed about a dozen workers leaving by bicycle at 5 p.m. on Apr. 18 as four guards stood at a security gate. At a research facility about a mile away, only an outline of the company's name could be seen. A lone guard said operations had ceased about a month and a half earlier. Eddie Fan, a spokesman for China Agritech in Beijing, says the company had moved its research operations to another location closer to the factory and would disclose the address when it files its annual accounts.

On Mar. 13, four days after Glickenhaus returned to New York, China Agritech said it had fired Ernst & Young Hua Ming, the auditing firm it hired in November to replace Crowe Horwath. Ernst & Young had asked for "an independent investigation in order to verify certain transactions and balances" and said the accounting firm had determined "it may not be able to rely on management's representations," according to an SEC filing. China Agritech also said Zheng Wang, a Carlyle executive who sat on its board, had resigned. Christopher W. Ullman, a Carlyle spokesman, declined to comment, as did Charles Perkins, a spokesman for Ernst & Young.

Trading in the shares hasn't resumed since it was halted on Mar. 14. On Apr. 18, China Agritech said it received a letter from Nasdaq saying the exchange intended to delist the company, a decision it has appealed. Wayne Lee, a spokesman for Nasdaq in New York, declined to comment.

James Glickenhaus, 60, Jesse's father and the family firm's general partner, says he is waiting for China Agritech to release its overdue audited financial statements for 2010. "We feel the audited figures will answer the question" of whether the company is legitimate, he says. For Jesse, he says, the affair has been the start of a long learning process, "like sending him to business school." Jesse Glickenhaus says the education is already paying off. "I'm not going to say you shouldn't invest in China," he says. "In the future, if I find a company in China, I'll probably stick to those that have had a major, well-known auditor for several years."

The bottom line: Companies that go public through reverse mergers can be hazardous, even for professional investors.

    Before it's here, it's on the Bloomberg Terminal.