Muddy Waters Research is in the business of taking down Western-traded Chinese companies by publishing scathing criticisms of them.
“The Chinese have an old proverb, “????” (muddy waters make it easy to catch fish). In other words, opacity creates opportunities to make money,” stated the research company.
For Muddy Waters, “opacity” means allegedly shady Chinese companies and “opportunities to make money” means shorting their stocks.
So far, Hong Kong-based Muddy Waters has taken down five Chinese companies, according to a Reuters study.
Its scathing reports took Orient Paper (AMEX:ONP) from $8.41 to $3.70, RINO International (PINK:RINO) from $15.52 to $0.53, and China MediaExpress (PINK:CCME) from $15.61 to $1.39.
Duoyuan Global Water (NYSE:DGW), meanwhile, plunged 29.3 percent before trading was suspended.
Most recently, Muddy Waters took aim at Canada-traded Sino-Forest (TSE:TRE), whose shares promptly fell from C$18.21 to C$5.33.
Muddy Waters alleged Sino-Forest started as a reverse takeover (RTO) fraud, a commonly documented practice in China. The fraud involved a Chinese company gaining access to Western investors by taking over a Western shell company, pumping up its stock price by using questionable and sometimes illegal marketing methods, and then dumping the inflated stocks to duped Western investors.
Muddy Waters alleged that Sino-Forest, unlike typical RTO frauds, has survived to become a mature institution (its market cap is almost C$1 billion as of June 7) through “luck” and “deft navigation.”
Specifically, Muddy Waters accused Sino-Forest of having a “convoluted structure” that hides its paper trail for revenues. Moreover, it alleged that the company “massively exaggerates its assets.”
Muddy Waters alleged that Sino-Forest’s Yunnan timber investments are overstated by about $900 million.
The research firm said Sino-Forest’s raising of funds from investors is a “multi-billion dollar ponzi scheme” and “accompanied by substantial theft.”
Sino-Forest’s “aggressive” commitment of fraud started in 1995, Muddy Waters alleges.
Generally speaking, Muddy Waters said “Western investors and their regulatory systems are inherently unprepared for muddy waters environments.” As such, “many sub-par Chinese companies find ways to game the system and trade at inflated values.”
Sino-Forest, in a press release, flatly denied the allegation of the Muddy Waters report. (The other Chinese companies targeted by Muddy Waters have also fought back against the research firm’s allegations).
It emphasized that Muddy Waters, being short Sino-Forest stocks, stands to benefit from publishing negative allegations against the company.
Due to the sharp drop in its share prices after the report, Sino-Forest has appointed “an independent committee…to thoroughly examine and review the allegations contained in Muddy Waters’ report.”
Then, the company plans to release key findings to shareholders.
Whether or not Sino-Forest is another Chinese fraud, evidence strongly suggests that Chinese companies do commit fraud against Western investors.
The Chinese companies do it to get money. Its Chinese and Western accomplices get a cut. US securities officials usually can’t go after Chinese companies for fraud because they’re out of their jurisdiction. Meanwhile, naïve Western investors are all too happy to be sold by fraudster on the Chinese growth story.