21Vianet Falls on Record Volume After Short Seller Report

21Vianet Group Inc., a Chinese Internet data-center operator, whipsawed investors in New York trading yesterday amid the heaviest volume on record after a short seller said the company is worthless.

American depositary receipts of Beijing-based 21Vianet swung between gains of as much as 18 percent and losses of up to 35 percent before closing the day down 8 percent at $20.12. The shares have now lost 27 percent over the past two days, the worst selloff since their 2011 listing on the Nasdaq Stock Market. Trading volume soared to about 37 million shares yesterday, more than 42 times the 90-day average, according to data compiled by Bloomberg.

Investor jitters about 21Vianet began to surface in the options market last week, days before Trinity Research Group released a report saying the company overstates its business and uses financings and acquisitions to inflate growth. Trinity said yesterday that investors should assume the firm will profit from a decline in 21Vianet’s stock price.

The bearish research on 21Vianet is of high quality and there are “hundreds of things” the company needs to clarify, Jun Zhang, a San Francisco-based analyst and head of China equities research at Rosenblatt Securities Inc. said in an e-mailed note. “There will be more downside risk for the stock,” he wrote.

21Vianet, in a statement issued yesterday, said the report contained “numerous errors, unsupported speculation and malicious interpretations of events.” The company said it is committed to providing a more detailed response to the allegations and intends to take action to defend itself.

Profitable Bets

Options traders who pushed bearish bets on 21Vianet to a record in the past two weeks profited from the decline in the stock. Put options with a strike price of $22.50 expiring on Sept. 20, the most-owned contracts, soared to $3.30 yesterday from 10 cents on Aug. 25.

Open interest in bearish options, which grant buyers the right to sell the shares, surged to more than 76,000 contracts on Sept. 9, up from about 5,000 on Aug. 25, according to data compiled by Bloomberg. Investors hold five times more bearish options than bullish ones, a reversal from the end of August when there were more calls than puts.

“A lot of people are buying puts and the stock’s been put under a lot of pressure,” Mark Sebastian, founder of Option Pit LLC, a Chicago-based education and consulting firm, said by phone yesterday. “It’s just been getting killed.”

Short interest on 21Vianet jumped to five percent of shares outstanding on Sept. 9 from 2.6 percent at the end of last week, according to data compiled by Bloomberg and Markit, a London-based provider of financial information.

Block Comments

21Vianet, which said on Sept. 4 that it will buy up to $100 million of its own shares in the next 12 months, joins the growing list of Chinese technology companies that have been targeted by short sellers. Others include NQ Mobile Inc., which Carson Block of Muddy Waters LLC said in October he was betting against. Block, in an interview at an event at Baruch College in New York yesterday, said he isn’t shorting shares of 21Vianet.

Trinity Research Group was established by a team of accountants, money managers and company executives, according to the company’s website. It aims to identify investment opportunities created by “false information” and “inaccurate” market perceptions, it said. The firm only invests the principals’ money and does not manage external assets, according to the site.

The firm declined to name its principals when contacted by Bloomberg News yesterday.

Temasek Holdings Pte, Singapore’s state-owned investment firm, owned about 6.7 million ADRs, or more than 11 percent of 21Vianet as of June 30, according to a filing with the U.S. Securities and Exchange Commission.

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