Unnamed bloggers uncover risky tales
Investors in Chinese firms have a new risk to grapple with.
Anonymous bloggers have begun posting research online alleging certain mainland companies are frauds.
Last week the aptly named 'Anonymous', a loosely connected group of computer hackers, took its first step into Chinese company analysis. A blog named 'Anonymous Analytics', which claimed to be an offshoot of the hacking group, alleged that Chaoda Modern Agriculture, a mainland farming company listed in Hong Kong, had faked its financial statements and funnelled more than US$400 million out of the company. Chaoda has declined to comment on the 38-page report and suspended trading in its shares just before it was published.
Another website that does not name its contributors, Alfredlittle.com, has published extensive and unflattering research about several Chinese companies whose shares trade in the United States or Canada.
To some, these shadowy commentators are like masked assassins, who bet a stock price will fall, via a practice known as short selling, and then circulate damning claims designed to depress the firms' shares.
Others say the no-name critics are filling a gap in the market for research about Chinese firms because investment banks sometimes produce overly positive research in the hope of winning lucrative work advising companies on deals.
The anonymous bloggers portray themselves as brave crusaders who publish under cover out of fear for their safety, though they also admit they make money trading stocks.
Lawyers warn it is difficult for regulators to pursue them because they probably cannot be found.
'Regulators, as well as criminal law enforcement authorities, should look into the world of anonymous short sellers aggressively and bring cases wherever possible,' said Jacob Frenkel, chairman of the securities enforcement practice at American law firm Shulman Rogers.
Short sellers are traders who borrow stock they do not own, sell it, and hope to profit by buying back the shares later at a lower price.
'Anonymous communications of favourable rumours or critical information are common tactics of persons trying to fraudulently impact the price of a stock,' said Frenkel.
Other experts say unless the claims are false, the bloggers could be usefully educating investors.
'I am a believer in freedom of speech,' said Thomas Holland, the head of Asia at international hedge fund Cube Capital. 'I think it's OK for bloggers to post such things. If they are untrue, the companies have a right to refute and put the facts on the table, and sue for slander or libel.'
Another Hong Kong-based hedge fund manager, who asked to remain nameless, said: 'Why should investment banks have a monopoly on research? Banks often recommend buying a company's stock because they want to win future work advising that company on a deal.'
Alfred Little states its contributors are often short sellers. A spokesman for the site, who identified himself as Simon Moore, said in an e-mail: 'Why else would they bother to do such costly research on dozens of companies if they did not expect to make a profit on the one or two companies that the research proves are cooking their books?'
And in an e-mailed interview, an unnamed spokesman for Anonymous Analytics said members of the group traded Chaoda shares before publishing the September 26 report. The spokesman added, however, that the group 'wanted to simply expose corruption', and did not make enough money beyond recouping some expenses to cover the costs of producing the research.
Sometimes, the bloggers appear to be on the right track.
An Alfred Little author wrote on April 8 that Ming Zhao, the chairman of US-listed Chinese company Puda Coal, had secretly transferred ownership of the company's main operating business to himself.
On September 1, Puda's audit committee confirmed the allegations. The US Securities and Exchange Commission is now seeking civil charges against Zhao for violating US securities laws.
Puda's shares were valued at US$9.10 on April 7. They now trade at 60 US cents.
As Holland points out, however, 'investors do our own due diligence' and do not trade blindly on the back of material posted online.
Silvercorp Metals, a Chinese miner whose shares trade in Canada, is suing Alfredlittle.com for defamation after it carried a report on September 13 alleging the company had overstated production figures. In its lawsuit, filed in New York on September 23, Silvercorp also named several so-called John Doe defendants - anonymous online critics it cannot identify.
But in this case, the bloggers appeared to have little effect. The silver miner's shares rose 23 per cent between the day of the report's publication and October 4.
A Silvercorp spokesman did not return calls requesting comment.
Anonymous Analytics has had little impact on Chaoda, so far. The farming company's shares declined 26 per cent on September 26, the day Anonymous' report was issued, but for an unrelated reason.
That morning, it emerged Chaoda was being investigated by the Hong Kong government for insider dealing because its chairman, Kwok Ho, and finance director Andy Chan Chi-po allegedly supplied confidential information to a fund manager. When Anonymous published, Chaoda had already halted trading in its shares.
Blogging about Chinese companies is nothing new, though doing so without identifying the author is certainly a novel twist.
Citron Research, a US-based short-selling firm, began posting critical reports about US-listed Chinese companies on its website four years ago.
But perhaps the best known practitioner is Carson Block, a 35-year-old American entrepreneur who founded a self-storage company in Shanghai before he began issuing reports about Chinese companies last June.
Block identifies himself in his research and readily admits he makes money from short selling companies' shares before posting reports on the website of his company, Muddy Waters. He rose to prominence on June 2 this year, when he claimed in a 40-page report that Toronto-listed mainland logging company Sino-Forest Corp was a 'stratospheric fraud'. Sino-Forest denied the claims, though its shares have been suspended and it was accused of fraud by the Ontario Securities Commission in late August.
Block said some people in his field may not identify themselves for fear of their safety.
'If the author is accurate in his allegations of fraud, then senior management is engaged in criminal activities. This demonstrates a willingness to cross a line that ordinary company managements would not,' he said.
Simon Moore, who identifies himself on Alfredlittle.com as the site's managing editor, also advances the personal safety argument to conceal his contributors' identities.
'[They] are terrified for their safety,' said Moore in an e-mailed interview. 'Researchers working in the field observing factories have been beaten and even kidnapped in the past and constantly worry about their safety on a daily basis.'
A more cynical viewpoint is that bloggers operate anonymously because, if they are making false claims, they are less likely to get caught.
'It is hard to identify a blogger and who is behind the words they use,' said William McGovern, a Hong Kong-based partner at American law firm Kobre & Kim. Bloggers 'use aggregated identities and they may not be rooted in an actual physical location'.
The fall in Chaoda Modern Agriculture's shares this year
- The company's stock was the most short-sold last month