China-Biotics, Inc. (CHBT): Post Unavailable Additional Informati...

swanlinbar · 2011-05-21T16:14:58.1270000Z

Interesting post.From Richard Pearson writing on TheStreet.com: "With China Biotics(CHBT_), the questions begin with "Is it possible to close 95% of the company's stores and not report any change in head count?" And "Is it possible to close 95% of the company's stores and still perfectly meet earnings guidance?" Obviously, the list of questions is much longer. Recently, a heretofore unknown investor by the name of Richard Azar has been buying up big chunks of CHBT immediately before earnings despite fraud allegations that are widespread and growing. If you Google the phrase "CHBT fraud," you get nearly 9,000 hits. Richard Azar and his unknown fund "Value Holdings" have quickly become a 10% holder of CHBT. Press articles from years past describe Azar as a Warren Buffett aficionado and a genius investor worth somewhere "in the low nine figures." A quote attributed to Azar says the following: "My concentration levels were at various times 40% to 50% of my net worth and today the four major positions I own represent 85% of my net worth." What I found puzzling was that when I looked for SEC filings by this concentrated investor worth a minimum of $100,000,000, I could find only one company for which he had submitted SEC filings. That company is CHBT. There are no filings for him prior to May 2011. This is despite the fact that he has done nothing but investing for over 20 years and describes extreme concentration in his positions. Azar's purchases are notable in that they all occurred in the $11 to $12 range, pushing up the price of the stock and giving much encouragement to investors, some of whom jumped on the bandwagon. Clearly, none of these investors had ever heard of Azar prior to this month. Here's a list of Azar's SEC filings. The other puzzling thing is that the attorney listed on the Form 4s is Alan Lerner. Lerner is a Ft. Lauderdale, Fla.-based attorney who hasn't done much business in years. Back when the Internet was the new hype, Lerner represented several small RTO Internet companies, all of which raised funds and then went bankrupt. Here are links to his previous filings. Lerner also represented Charles Adams of Pegasus Wireless (a proven fraud) in connection with a default on a convertible stock loan in 2008. In addition, Lerner represented Dennis Crowley, CEO of Florida-based Spear & Jackson when he was convicted of illegally dumping insider shares offshore after running a pump-and-dump scheme. I was surprised to see a post on CHBT by Larry Isen this week, highly recommending CHBT just before earnings and after the stock had already risen by over 60%. Isen was previously convicted of taking restricted stock from one or more companies in exchange for promoting them. He then illegally sold those shares. As usual, the sales were made offshore in a failed attempt to avoid regulatory scrutiny. But back to Azar. It strikes me as odd that this unknown investor suddenly acquires a 10% stake in a company immediately before a critical earnings report and selects an attorney who has substantial experience with offshore-share-dumping clients. Other high-net-worth investors I speak with hire high-end law firms from Wall Street to do their filings and manage their securities transactions. Azar could seemingly afford whoever he wants. I am currently in Hong Kong speaking with a number of securities lawyers and other financial types. I am 100% convinced that within the China space there is a new and unreported phenomenon going on. Management at fraudulent Chinese companies are effectively "monetizing" their stock before the share price plunges and pulling in hundreds of millions of dollars by doing so. Here is how it works. A company chairman/CEO (let's call him Chairman Wang) uses his stock as collateral for a loan. The stock is worth $100 million, so he gets a loan secured by stock valued at, say, $80 million (giving the lenders a nice cut). When the stock plunges, he simply defaults on the loan and keeps the cash. It's easy and no SEC disclosure is required. Chairman Wang gets the loan and provides the stock as collateral to Party A. Party A now holds the stock and "lends" it to Party B (this creates stock borrow). Party B then shorts the stock, so that the risk is completely hedged. Obviously, Party A and Party B have an agreement to share the economics. Bingo. Chairman Wang "monetizes" his stock, keeps the cash and the lenders of the money are protected. The shares are delivered to the lender before the loan is even made, such that the proceeds of the short sales fund the loan. In other words, the lenders don't even need to have their own money to lend, they just need to be able to facilitate the short sales. Obviously, the short sales will put significant pressure on the share price, to the disadvantage of those still holding shares. This type of fraud has gone totally undetected and I am now of the opinion that the dollar amounts involved far exceed the amounts raised from U.S. investors in equity offerings. I am currently doing much more digging on this and speaking with as many well-informed experts as I can. If anyone has comments or observations on this, they would certainly be welcome at my email address below. Disclosure: The author is extremely short CHBT. The author can be reached for comments at comments@pearsoninvestment.com