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02/13/24 11:18 AM
The China Hustle is a 2017 finance documentary produced by Magnolia Pictures and directed by Jed Rothstein.[1] The documentary reveals systematic and formulaic decades-long securities fraud by Chinese companies listed on the US stock market.
Many of the film's protagonists such as Dan David and Jon Carnes are activist shareholders and due diligence professionals who discovered the frauds, including fabricated accounting and brazen misrepresentations, and subsequently shorted the stock in order to bring about the collapse of the entities which often led to class action lawsuits, NASDAQ delistment, and SEC deregistration.[2][3][4]
Synopsis
After the financial crisis of 2007–2008, as investment firms in the United States look for ways to improve clients' investment performance while earning money for themselves, they chance upon the idea of selling opportunities to unsuspecting Americans who want to get rich by participating in the "China growth story" but do not know much about the country or its companies.[5] They do so by getting small nondescript Chinese companies (like Orient Paper and Advanced Battery Technologies (ABAT)) to do reverse mergers with defunct American companies (like Buffalo Mining) and thus get listed in the NYSE overnight.[6] The hype that accompanies this is aided by paid guest appearances by the likes of Bill Clinton and Henry Kissinger at so called "investment conferences" organized by B level investment firms (Roth Capital is one such firm featured in the documentary), thus adding a garb of respectability and reliability.[7] The stocks of these companies see spikes, investment firms goad their investors into buying them, siphoning off brokerages on the way. When the prices of these stocks crash to their real value, unsuspecting savers are left holding large amounts of worthless stock in their 401(k)s.[8]
The documentary investigates the collusion that occurred from 2008 to 2016 between second and third-tier US-based Wall Street investment firms such as Roth Capital Partners[9] and small companies based in China. Most of the companies featured in the film were listed in NYSE through reverse mergers.[10] The film reveals that the actual revenues of Chinese firms (reflected in their filings with Chinese government entities) were typically one-tenth of what was filed with the SEC.[11] Subsequent to investigations, most of the firms were de-listed from the NYSE resulting in losses of billions of dollars to US investors.[12]
Information on the frauds was published in Chinese newspapers in 2010 including the online edition of Sina, but American investors were unaware of these as the articles were mostly in Chinese.[13] Subsequently, the small research and investment firm Muddy Waters published translations of the Sina reports but they did not receive much attention.[14]
The film concludes with a closing sequence that highlights the continued lack of regulatory oversight in Chinese securities fraud. Out of approximately 400 Chinese companies, only one CEO went to jail for fraudulent reverse mergers. The film also suggests that Alibaba Group's and other existing Chinese firms' claims of high growth rates might be just as fraudulent.
