Savvy Trades and Investments

[mandjb]

Chinese scam playbook

I wrote this 6 years ago. I'm sure it applies to Indian scams, too. Turns out I was completely right on Armstrong, BTW.

What To Do When Caught With Your Hand in the Cookie Jar


When faced with often-irrefutable evidence of fraud, the Chinese firms took one or more of these steps – usually more than one in sequence:

1) Staunch denial: The “pining for the fjords” defense, for those who remember Monty Python. Simply refuse to acknowledge the truth.

2) Reiterate the same lies: Simply put out a press release saying that they still were confident of their previously stated bogus guidance. The bagholders who bought the story from day one will embrace any scrap of fiction to avoid the awful truth of their situation. This allows the fraudsters a few more weeks to sell, sell, SELL.

3) Rebuttal with new lies: Take each point in the expose and refute it with additional fabrications, often involving staged fiction or Photoshop. More time – SELL!
Here’s an example of a company – Sino Clean Energy - which boasted of $46,000,000 in revenue in their SEC filings while admitting to local authorities that the actual revenue was $180,000, far less than 1% of what they claimed.
Microsoft Office may issue a warning on the following link but it’s OK.
http://labemp.files.wordpress.com/2011/05/sino-clean-energy_s-20-million-chinese-ponzi-share-scheme1.pdf
After the fraud was exposed, management issued a tape supposedly showing more business activity than the facts indicated. Turns out the tape was doctored and showed the same 2 trucks in a loop.
http://seekingalpha.com/article/269517-sino-clean-energy-who-lied-about-the-weather

“Look very closely. The 1st, 3rd and 5th trucks that drive down the street are the same individual truck. Likewise, the 2nd and 4th trucks are the same individual truck. So what looks like five trucks going down the street is actually two trucks going around the block over and over again to create the impression of heavy business traffic.”

This party exposing the fraud had already discovered that the company owned only 2 trucks.
The Chairman of the SCEI Audit Committee resigned a few days later – see action #10.

4) Claiming they could not respond because they were in a “quiet period.” This refers to SEC rules about actions that cannot be taken within a certain time window around an earnings announcement. Of course, the companies then fail to release the earnings, indefinitely perpetuating the “quiet period” excuse.

5) Blame the messenger: Rather than defend the company, they focus on how evil short-sellers are. The truth is quite the opposite, of course. Short sellers tend to be the smartest, most rational, and most diligent investors of all.

6) Announce a bogus stock buyback or dividend: Claim that the company is confident in its prospects and will buy back stock on the open market or issue a dividend. Then fail to do so even once.

7) The phantom buyout offer: Announce that management will buy the company at $x per share. This allows them time to unload shares somewhere near $x. Somehow, financing is never secured and the deal fails. Shocking.

8) Internal investigation charade: Claim that the company is shocked that someone within their organization might be Chinese…er, stir-frying the books. Appoint a special committee to investigate the accusations. Right. If there actually is an independent person on the committee, that person will be stonewalled. Fraud NIV put it this way:
"The Special Committee has encountered difficulties in obtaining cooperation with the Investigation and as a result, no assurance can be provided as to when or if the Investigation will be completed." NIV NT-10Q
Eventually, anyone truly trying to investigate realizes the situation:
My interest in seeing this process through to its completion remains unwavering, but the continued resistance of management to these necessary steps has made it impossible to advance this effort. Accordingly, I am compelled by conscience to resign from the board of directors and the audit committee, effective immediately.

9) The Lance Armstrong defense: Sue everyone in sight trying to fend off discovery of the truth. You certainly have heard of Mr. Livewrong, the biggest fraud/hypocrite in sports history. There are actually a lot of folks who believe he is telling the truth when he says he didn’t dope. How I envy those people – it must be nice to float through life unburdened by logical reasoning or any grasp of science or probabilities. Anyway, the Texas Con Man has a team of lawyers who sue anyone who suggests that it might be unlikely that the person regularly beating out an elite field of doping cyclists was, amazingly, the only clean one. Ulrich, Basso, and all the others he barely beat all those years have all either been caught or admitted to doping. What are the odds that Lance is so literally superhuman that his oxygen uptake is higher than world-class cyclists on EPO? Could he be that far off the human normal distribution? We wouldn’t be just talking about a “black swan” event here (an amazingly unlikely occurrence). We’d be talking about a “black swan crapping golden eggs” occurrence.” Odds of happening – 0.00, the same odds that Armstrong is an upright fellow. Sadly, I’ll probably be sued for writing this, or even thinking about writing this. You may be now at risk for reading it – my apologies.

Notice that when Floyd Landis and Roger Clemens were caught cheating, they both sought Livewrong’s advice and of course were told to take the offensive. How did that work out? Landis went from merely disgraced to disgraced and destitute fighting legal battles. He later admitted that both he and Livewrong were cheaters. Clemens, another Texas Con Man, sued his accuser which opened him up to discovery. That went poorly as Roger’s fondness for adulterous trysts with underage country singers was discovered (they claim they waited three years until she was 18 ...uh huh) and more doping evidence was uncovered. Clemens now has been indicted by the Feds (he wasn’t before his offensive – what an IDIOT!) ) and goes to trial in July.

But I digress. Back to the point, the Chinese companies often sue their accusers, trying to scare them off or simply throw some FUD (fear, uncertainty, and doubt) into the situation. Again, it is done to buy time to unload more shares on the public.

SCEI, the fraud mentioned in item 3, said they would sue everybody in sight and reward shareholders thusly:
Sino Clean Energy Board declared June 13, 2011 as the record date for holders of shares of common stock of the co to receive a special dividend in the form of a contingent value right (2.64)
This CVR entitles each holder of CVRs to receive a portion of the proceeds, if any, the Company may receive from a favorable judgment or settlement relating to the complaint filed by the Company on May 9, 2011 in the Supreme Court of the State of New York against Geoinvesting, Alfred Little, the owner of Seeking Alpha and other unidentified persons acting with, for or through them.

Of course, if they recovered money for any reason, shareholders already have a claim via their share ownership so there’s no need for any special dividend. Just more useless fluff. Imaginative, though! The stock didn’t go up after this crap meaning that investors now have way more (but still not nearly enough) understanding of the legitimacy of Chinese “companies.”

10) Cockroaches in the light: Finally, after one or more of the above have run their course, everyone heads for the hills. The hills, in this case, are the Swiss Alps where a mansion purchased with the proceeds from the fraud awaits.