We watch China more closely since Donald Trump was elected President. Don’t think China, Inc., only includes the Chinese, because it also includes Americans with a penchant for avarice. Every day we learn more about how much America has been abused. It makes us angry. Please, don’t look away. We need full disclosure to even attempt putting our Humpty Dumpty country back together again. Giving up, surrender, it is not an option. We MUST clean up the mess.
I implore you to read the following. I’ve never written anything more important. It’s the biggest problem in our country. Someone like AOC comes on the scene, and yesterday she demanded action on student loan debt. Well, the entire budget for the Dept of Education is about 61 billion dollars (including student loans). The problem with China is about 500 billion in trade imbalance (which gives China the USD needed to purchase raw materials in an open market they desperately need to import), 200-500 billion in annual intel theft, about 40K dead Americans every year from fentanyl, ……… and today, hundreds of billions in outright fraud. If we fix the China problem, Student Loan Debt becomes easy.
Now, we understand why Candidate and now President Trump has been screaming about China.
We have to understand how China’s fraud has grown and become galactic. We need to know how and why Americans assisted in the corruption. We need to stop China.
We may have to do several articles on this because it’s more complicated than we ever imagined and it’s impossible to land in the middle of the storm without reference. Let’s start small and quickly work our way up. Stay with me, please.
Background – A Frame of Reference
Site Visits to Publicly Traded Companies Are Necessary for Confirmation of Representations Made by the Company. Investors must have accurate information.
A publicly traded company creates a series of financial statements to give investors a picture of where they stand. The financial statements are then audited by an accounting firm. These representations are published in a “prospectus” (which no one reads except people like me), kind of like a brochure, on thin paper, with small words, bad fonts, and lots of footnotes. It’s the duty of the brokerage firm or investment banking firm bringing a company public in an IPO to check the company’s representations with site visits or forensic accounting.
Months ago, I wrote a story about a progression of parties at the B&B where the staff, miraculously, over-performed. Laying in bed on Monday morning, my best corporate client demanded my presence, asap. Turned out, he expected reps from brokerage houses which owned about 40-50% of the company’s outstanding stock – the next day. The following day, they expected bond daddies from all over the world who held about 60% of the corporate “paper” or debt. My dear friend, the plant manager, had no idea how important the site visit was. As a former partner in a brokerage firm, trained to inspect property, plant, and equipment…. as well as the financials…… I knew was a big deal. It was a “do or die” two days, which would affect stock price, my friends, and the entire company. So, you have a personal anecdote, a visual, of lots of people running around, clipping trees, making pretty food, dressed in their Sunday best, trying to make a good impression, with ALL lights on and ALL equipment working. THAT’s a site visit.
American Investors Understand the Importance of Due Diligence and GAAP
SEC filings in the USA are serious, and if you misrepresent earnings or commit fraud, your executives end up on CNBC, or in front of a Congressional Committee, or they may land in jail. It’s serious in the USA.
It’s NOT so serious in other countries. The USA, for decades, was the most reliable country in which to do business, less than a 5% corruption expense (yes, we really do have studies for such things). Doing business in South America, I was shocked by my own naivety and our American innocence about the rest of the world and how they operate. The ever-present corruption in South America/Central America/Caribbean was calculated about 30% of expenses. Middlemen had to have their palms greased along the way. Shady payments and odd bank loans were commonplace. We have no grasp of how lucky we are in the USA, how reliable our banking and legal systems are, and how much it helps our GDP.
The Ethics Have Changed Within the USA
Way back when, if a broker advised clients to pour hundreds of millions of dollars into a company, they damn well knew whether or not the company was “as represented”. Any whiff of irregularity was a problem. The ethics of a new generation are not necessarily the same. I was trained in the 1980’s and our local site visit was in the mid-90’s before internet bubble, the Twin Towers coming down, Enron, and the Great Crash of ’08. In the OLDEN DAYS, we all followed the same rules.
Doing Business In Another Country – Expectations vs. Reality
Cashed out of the firm, married and a mom, living in obscurity in rural Mississippi, the world of portfolios and long-term airport parking was far away….. until I met Big T and we decided to build a pool. The tile was too expensive and I decided to become an importer to save money. The company took off from there. I’ve written many stories about importing, but there’s another part which is critical to understanding this whole spiderweb of a story and today’s monumental topic.
More than anything else, it’s about Judeo-Christian ethics in the USA versus ethics in other countries. We expect others to do business as we do, act honorably to develop MORE business, but they don’t. A quick profit is too tempting and the culture consistently promotes cheating on a first order…… because there is a never-ending stream of gullible Americans. Ya’ gotta check what you buy and babysit the order.
Big T and I intended to open a stone yard… just like many others did in the mid-2000’s. You’ve probably seen such businesses, granite and marble slabs, plumbing supplies, kitchen sinks, etc. Yet, mistakes within the first container made me see a problem in the supply chain which no one else was addressing. I ordered stone and might as well have received bikini tops and BIC razors. After a 30K loss, I was mad. Told my sad story to other stone yard owners, and they grimaced and nodded. We spent time commiserating about our similar problems. I decided “reliability” would be my focus. Somehow, I needed to FIX the trustworthiness problem and my clients could become my stone yard friends. If we couldn’t order with certainty, then none of us were safe.
Previously, other stone companies would send someone all the way to China/India/Brazil to approve the material for a container. They often bragged about Mr. XYZ who traveled the world in search of their perfect stone. Truth was, no one can be in all places at one time. It was inefficient. I loved to travel but had the B&B and Gunner was little. Taking off for 4 days to China was not an option and added $5K in expenses to the cost of each order. Plus, Chinese companies were incredibly sneaky about hiding problems while I was standing there. Broad Daylight! I also noticed my American competition would arrive to China, expecting a completed order, and the material was not as advertised, wasting more time, fighting over money/material at the last minute, and the American always lost. What to do?
Solving the Trustworthiness Problem of Overseas Orders
I decided to hire people overseas, fluent in their own language, well educated, well respected men in their communities, ……… and men with specific knowledge about the material I was buying. All of these men spent decades in the business and forgot more than I would ever know. They became my eyes and ears on the ground, and I valued their opinions and judgement dearly.
What I did, innocently, was send my trusted men into places to inspect materials before processing, to oversee the production process, supervise the loading and check for quality, BEFORE shipping. In other words, our guys were inspecting property, plant, and equipment + finished goods, insuring a smooth delivery. No one else in our industry offered a similar service. It worked. The reason I did it was because of past experience in the finance industry – which has nothing at all to do with stone. Pure happenstance. Gotta check before you buy.
Summary for Background: We understand doing business in foreign countries is tough because their culture does not do business as we do in the USA. We have a problem with ethics in the USA, Club Med prison sentences, and no serious repercussions. We understand Investment Banks who represent IPO’s, or brokerage houses, are supposed to do their due diligence to check property, plant, and equipment, and the SEC is supposed to guarantee GAAP procedures and investigate irregularities in corporate representations or a filed prospectus. Yet, …………………..
That’s not what happened on Wall Street with Chinese companies.
What happened in the USA between 2006 until today is economic warfare, pure and simple. It was intentional with malice aforethought. Americans were complicit because of their laziness and greed. Almost no due diligence has been done on Chinese companies which are publicly listed on the NYSE, and the financials are hidden from our SEC, or are easily faked by Chinese auditors who bought a franchise in Deloitte/Price Waterhouse, etc. Billions and billions of dollars has been bilked from US investors. The fraud and corruption are like nothing we’ve ever seen.
This story is the biggest worldwide financial crime of the last 25 years, and almost no one is listening.
“Dan” was a broker selling securities for publicly traded Chinese companies on the NYSE when he got wind of the fraud. Dan got mad, began to investigate, and turned into a short seller, investigating what he thought were fraudulent Chinese companies, and taking them down. Dan tried to get the attention of Senator Toomey, the SEC, Congress, and the media. No one wanted to burst the China bubble. Dan stars in a movie made about the story, “The China Hustle”, in 2018. Here’s the movie trailer….. hold onto your seat.
The movie/documentary is riveting (no wonder they made a movie about it) and about an hour and a half long. Here’s the summary for those who don’t have time: Grab a cup of coffee and a chair. You won’t believe what you’re about to read…………
Here we go:
Roth Capital was a small investment banking company on the west coast. They held terrific “investor conferences” with big name entertainment like Billy Idol, Sting.
Rodman and Renshaw was on the East Coast and a little more highbrow. General Wesley Clark, former NATO Commander, and Presidential Candidate was their CEO. He brought in speakers like former Presidents Bush and Clinton + Colin Powell. All in all Rodman and Renshaw = 40 companies brought to market = 31 billion USD. Assets are either gone, or almost worthless. As companies were exposed, their stock prices tanked and the Chinese company was delisted from the NYSE.
How did they do it? ………. it was easy.
After 2008 crash, everyone was looking for a way to recover, quickly. The USA and EU were dead but China’s economy was growing like a rocketship (allegedly). American Wall St types wanted an invitation to the party, but they couldn’t invest in China Companies on the NYSE……… until Roth Capital figured a way in via the back door.
Roth looked for older and inactive companies, like a mining company, mostly in Nevada, which still was a publicly traded company with NYSE listing (had a ticker symbol). Then, they did a “reverse merger” with a Chinese company, didn’t matter if the sectors were different, and the new company emerged with a new name, maybe with the old ticker symbol or a maybe a new ticker symbol.
Between 2006-2012, 400 Chinese companies were listed on NYSE Stock, and about 80% were reverse mergers. Normally, for a US company, SEC filings are complex and watched closely. Audits and reporting are constant. Therefore, the US investor has confidence in the “prospectus” (balance sheets accounting GAAP representations) of a particular company. But the greed was HUGE and companies were audited by Deloitte/Coopers Lybrand/Price Waterhouse…… in China, which is nothing more than a franchise. From 2009-2010, most reverse merger companies rose 300-400% in value. Everyone wanted in the game….. the champagne flowed…… just don’t be looking for a chair when the music stops.
Everything was fine until an older stockbroker asked his son, who was working in China, to check out a particular company called Orient Paper, Inc. Dad was old school, gotta check it out before you buy…… that’s how we were trained. Dad was doing his due diligence. Well, what the son, Carson Block, learned was extraordinary. It was a paper company, but there was water everywhere in the factory. Half the equipment was broken, and there was no way in hell they were doing 100 million USD/year. The company listed 5 million in inventory on the books, which amounted to a rotting pile of cardboard, outside in the rain. Carson called his dad, asap. Carson also decided to write up a report about his findings and short the stock. Next morning, down 25%, by afternoon, down 55%. The company was a fraud.
Carson’s discovery was the very first ripple or WHIFF of irregularity. Of course, powerful people were angry and sent lawyers, guns, and money……. literally. Roth Capital sent lawyer Nussbaum from Loeb and Loeb, the super-lawyers, to smear young Carson. Yet, Carson was correct. The interview with Nussbaum, years later…….. is…. amazing=no due diligence, the auditor, a rented Deloitte shop “reviewed” docs from the management team and rubber stamped them. No one had any culpability for the false statements on balance sheets. No way to seek restitution against a Chinese company …. and the salesmen had to face the investors with bad news.
Dan was the founder of a little firm in Skippack, Pennsylvania. Dan was at an investor conference for Rodman and Renshaw on the east coast when the report about Orient Paper broke. He was stunned and went back home to discuss with his other partners. One partner sold 21 million dollars worth of shares in Orient Paper and he was furious, “Not As Represented”. He went on an African safari to think about it, came home, and decided to fight back. They became curious about the companies they were selling. They decided to go to China and check on China Green Agriculture. Rumor had it, Nestle was thinking of buying the company, and they were looking to cash in.
China Green Agriculture managed to do 100 million in revenue on paper…. but only had one truck driver. They videotaped the company for about a year and sent in a guy posing as a tea salesmen giving away samples of Chinese tea to figure out how many employees were there. The company was a fraud. Crocker Coulson was the guy on Wall St who pushed companies like China Green Ag., who claimed years later, paraphrasing, “We did a lot of effort/research to flag inconsistencies…. but there was no way to know what was happening”.
These Wall St firms did no background, because one visit was all they would have needed. 113 Million USD ~ Poof! Gone. Dan at Skippack went to the bigger investment banking firm and told them the problem, showed them his year-long research, on a pitch for the investment firms to HIRE him to do the due diligence…. but they threw him out and told him to keep quiet….. which turned Dan into a short seller and an activist to take fraudulent companies DOWN.
Dan and the others were convinced they were onto something bigger. He began to investigate company after company. The “filings” in China were mostly accurate, but enormously inflated earnings were represented in the USA. Dan couldn’t find Chinese auditors who were honest, because, as Dan said, “We can’t find auditors in China that will help us, because let me tell you something, if we do…..find those people…….. the government of China will kill ’em. I mean, they will take their ass out and shoot them in the fucking head.”
Is that who you want to buy Nike T-Shirts and Northface gear from? No, we’re definitely NOT in Kansas anymore.
Word got out and they began to unwind a spider web of deception, purposely funded and promoted by the Chinese government, assisted by Chinese police and bureaucrats. The scale of fraud was enormous and surprised the “smartest people in the room” on Wall Street. Somewhere between 20-50 BILLION dollars from USA investors, for companies that could be worthless. Mom and pop investors, mutual funds specializing in “emerging markets” became victims, even the pension fund of the NYTimes represented by VANGUARD was in on the deal.
Remember what I said at the top about brokers, old school fund managers being trained to inspect property, plant, and equipment? Well, we’re also trained to to look at patterns across multiple pieces of informations to spot trends. For instance, I can look at a couple’s checkbook and almost immediately spot a cheating spouse, and identify within a week, when they started the affair. Their patterns change. MANY short sellers, who are highly trained in forensic accounting can spot a pattern. Today, they look at companies to compare data across a wide spectrum to uncover problems. In this way, the short sellers become the champions of the fraud busters. They become another investigative arm – motivated by incredible profits.
The fraud was simple and could not be perpetrated without a blessing from Chinese bureaucrats, the CCP. A Chinese factory, a CEO who was willing to lie (who would never go to jail in China if caught and who could never be extradited to the USA for crimes), an auditor who was compliant, pre-packaged Chinese legal, and a compliant US investment bank who happened to find an old company in the USA who was still public, but inactive….. and the reverse merger was set.
Another canary in the coalmine began obscure postings on Yahoo chat boards under the name Alfred Little, very similar to the modern day QAnon. He turned out to be one of the few short seller “activists” left in China. He went after Silvercorp with a Chinese national “source”, who was eventually imprisoned and made Chinese Christmas lights for two years……… from prison. Silvercorp called local Chinese constabulary for assistance. Jon Karnes (the real Alfred Little), tried to get help from OUR Securities and Exchange Commission but the SEC bureaucrat in charge told him, “Our phones can’t even dial China.”
Carnes joined Dan, and surfer dude who understood the machinations of the fraud. They decided to keep going, unraveling Chinese companies, along with Carson Block the son of the stockbroker. Dan went as far as hiring a lobbyist and taking the information to Congress – so they would ACT and help Americans. He tried to speak at Congressional hearings, but was rebuffed. Now, hundreds of billions in fraud on Americans, and no one was listening.
As of this movie in 2018, the SEC only busted 1-2 of these companies. All the Chinese CEO’s got away with the money. Only one Taiwanese CEO went to jail in the USA. The little band of misfit short sellers, had taken down about 40-50 companies. Hundreds of companies were delisted as worthless stocks. Yet, over 100 Chinese companies remain, a little bit cleaner, with a market cap of over 1.1 TRILLION dollars, no way to verify if the accounting is real, and no way to investigate or sue them for wrongdoing. Heads or tails, the Chinese win.
The SEC, on this issue, was a farce and cannot protect USA investors. In China, it is not illegal to steal from a foreign company. The USA cannot compel a Chinese “Bernie Madoff” to come to the USA to testify. There’s no way to look at the real books of Chinese companies. If you go to China to meet with the bankers of Chinese companies, often, the bankers will change the books for the Chinese company.
Frustration grew. No one would listen, not Congress, the SEC, his Senator, not the Chinese authorities (who helped the crooked companies). So….. in real robber baron fashion, our misfits decided to steal their money back. Take…. from the thieves. First target was Tech Pro, a 2 billion dollar company. Dan flew to Hong Kong, gave a presentation to analysts on his research about Tech Pro, and drove the stock down 93.66% in two weeks.
Did Dan make money shorting the companies he investigated? Bet your a$$ he did. BUT he also outed the rats. And there are, still, so many rats. In fact, they call it Cockroach Theory. Kill one, but who knows what’s behind the walls?
Public pensions and retirement funds lost an estimated 14 billion…. but the real number is much higher. These folks were lucky to grab a chair when the music stopped. That 14 Billion alone makes China the biggest financial crime of the last 25yrs. There is no way to tell how many private investors were hit, but their stories are heartbreaking.
As Carson Block explains, “China is fundamentally a broken or a f$cked up system. The people who get to the top, get to the top by breaking rules. The little people who want to play by the rules get pushed to the bottom.” As explained earlier, there really is no legal system of any merit in China. A bad guy can always buy his way out of a problem. With no rules or repercussions, of course, our guys on Wall St would do the same thing.
It’s also why the reliability of the legal system in the USA is sooooooooooo important, and why our push for culpability with FBI/DOJ/CIA/State Dept is necessary. If we don’t fix it, and restore order, we become China.
It’s not just these 400 companies either, and this 50 billion (estimated) dollars, we know there is so much more fraud in China.
The credit buildup in China is nothing like we’ve ever seen before, their crash will hit everything. Over 40 Trillion in printed Yuan has been added to the system since 2008 (subject for another article).
Take for example, Alibaba. I joined Alibaba in 2004 as a member. When they went public on the NYSE, my jaw hit the floor. Why were they allowed to trade on the NYSE? In 2016, the SEC started an investigation into Alibaba’s accounting practices……. and Jack Ma is gone from the board….allegedly signed over all his interest and shares…. and not in jail. (Jack Ma’s downfall is the subject of another article)
Today, Roth Capital still has investor conferences with big name entertainment. Rodman and Renshaw were fined and lost their license, but emerged under a new name. The game continues. Remember, over 100 Chinese firms trade on the NYSE, with a market cap over 1.1 TRILLION dollars.
Concerning sidenote: —– Jay Clayton, a lawyer who worked on Alibaba’s IPO, was appointed as head of the SEC by President Trump. It’s interesting how a few guys brought this scandal to the surface. When President Trump started talking about China, it all started to come out. And we sure would like to dig into those 400 companies, most of which were based in Nevada, to find any possible connections to Harry Reid.
And look at Retired General Wesley Clark at the end of this movie. He’s shamed in this movie, barely “able to walk the streets” for his involvement. Yet, he still sits on the boards of 18 publicly held companies.
Here’s the whole movie, The China Hustle, with Spanish subtitles, but the movie is in English. Have fun!
I told ya’ it was good!
