Companies listed in US fight short-seller claims

Updated: 2011-07-08 08:17

By Karen Yip, Ariel Tung and Li Xiang (China Daily)

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BEIJING / NEW YORK - US-listed Chinese companies are taking action to fight fraud allegations made by short sellers such as Muddy Waters Research of the US.

Spreadtrum Communications Co Ltd, a US-listed Chinese telecom manufacturer, said recently in a public statement that the allegations made by Muddy Waters are groundless. Leo Li, its chief executive officer, told China Daily that Muddy Waters' report lacks supporting material and Spreadtrum has "solid fundamentals and fairly strong governance".

Companies listed in US fight short-seller claims
An engineer in the R&D department at Spreadtrum Communications Inc's facility in Shanghai. US-listed chip designer Spreadtrum says allegations made by Muddy Waters are groundless. [Photo/Agencies] 

Sino-Forest Corp, another Chinese company accused of fraud, also openly responded to Muddy Waters' allegations, saying they are untrue and that it is considering taking legal action.

Spreadtrum's share price plunged 66.7 percent, from $24 to $8, soon after Muddy Waters published its report on June 28. But the stock climbed back to $12 afterwards.

During a Bloomberg TV interview, Carson Block, founder of Muddy Waters, said he thinks of himself as "someone who is protecting the investors" although he hinted that he may be wrong about Spreadtrum, saying if "we misinterpreted these points as red flags, then the company's transparency has improved and the stock is going to go up".

Responding to e-mailed queries from China Daily, Block explained his motives, by saying that accountants, lawyers, and bankers are likely to have had their fees curtailed as these fraud allegations have surfaced. "It's not unexpected that some of them would bear animosity toward short sellers," he said.

Block added that traditional equity research has substantial conflicts of interest and claimed that his model is at least more transparent in its conflict. He claimed that short sellers protect investors from fraud and if the system were working properly, short sellers wouldn't have been able to expose so many alleged improprieties.

But market watchers said that the Spreadtrum case has hurt the credibility of Muddy Waters and the game of shorting Chinese stocks may soon come to an end.

"Companies such as Muddy Waters won't have a long-lasting impact on US-listed Chinese companies, and we think that the turning point may soon emerge," said Huang Haizhou, chief strategist at China International Capital Corp (CICC).

"The activities of short sellers such as Muddy Waters will soon come to an end, and Muddy Waters may be faced with legal action by the Chinese companies if its claims are proved to be false," Huang said.

Reports by Muddy Waters have landed Orient Paper Inc, China MediaExpress Holdings Inc, RINO International Corp, Duoyuan Global Water Inc, Sino-Forest Corp, and Spreadtrum Communications Inc in hot water with regulators and investors.

Short sellers, who borrow stocks in anticipation of selling them and then buying them back at a lower price, are awaiting more bad news, and the buzzwords to watch out for are stock delisting, auditor resignation, and a trading halt.

All eyes are now on Chinese companies nearing deadlines to file their annual reports with the Securities and Exchange Commission.

"I believe that short sellers have their own interests in mind - to make money", Kevin A. Pollack, managing director of the US-based hedge fund Paragon Capital, told China Daily.

Pollack said investors should consider this when responding to short seller reports.

After Block's report on Sino-Forest, John Paulson, the largest shareholder in the Chinese tree plantation operator, sold his holdings for $500 million less than he paid.

Analysts said that some Chinese companies with solid fundamentals, such as Spreadtrum, were mistakenly punished by the short sellers, and that the recent sell-off of Chinese stocks may provide a good entry point after the market stabilizes.

"We believe several quality names might have been mistakenly punished during the indiscriminate sell-off, and we see a good entry point emerging when the market stabilizes," CICC analysts Chang Yuliang and Huang Haizhou wrote in a report.