On Wednesday, GeoInvesting released an article titled “China Finance Online: CEO Resigns from Key Posts in China Amid Anti-Corruption Probe.”

On Thursday, China Finance Online Co. (NASDAQ:JRJC) issued a “Rebuttal to Short Seller Article” in which it claimed that the “Geoinvesting report contains numerous errors of facts,” without actually proving that any of the facts presented in our report were untrue.

Our rebuttal today addresses JRJC’s response, which we believe has fallen completely flat.

• JRJC’s response fails to prove we made any factual errors, and actually affirms our findings that Chairman Zhao resigned from his positions at three key JRJC VIE subsidiaries.
• A Chinese media article out by Tencent the day after our report supports the conclusions we’ve drawn.

On Wednesday we pointed out:

• The most current SAIC records show JRJC Chairman and CEO Zhiwei Zhao suddenly resigned from his positions at three key Chinese VIE subsidiaries of JRJC over the past few months.
• This development had not been disclosed by management. Additionally, Zhao was also mysteriously absent from JRJC’s March 23, 2015 fourth quarter earnings conference call.
• Chinese media reports exposing the detention of JRJC independent director Rongquan Leng prompted JRJC to announce his resignation, without addressing his alleged detention.
• Chinese media reports also indicate serious legal troubles for associates of Zhao, who himself is reportedly not allowed to leave China.
• Ling Wang, a former long-time JRJC director and associate of Zhao, fled China in 2014, leaving his company indebted to JRJC for $25 million.

JRJC “Rebuttal” Affirms GeoInvesting’s Findings

JRJC’s “rebuttal” actually affirms many of the key facts supporting our findings, as follows:

1. JRJC did not deny that Chairman and CEO Zhiwei Zhao resigned from management positions at 3 key VIE subsidiaries.  Zhao’s resignations, in our opinion, are extremely negative events that investors would not consider to be a “normal course of action.”  Unless, such action was in fact a response to serious legal problems faced by Zhao.
2. JRJC did not deny the media reports that Zhao is in legal trouble.
3. JRJC confirmed that Zhao was not on the last conference call, citing health reasons.
4. JRJC provided no evidence (photos, interviews, public appearances) that could easily confirm that Zhao is free to run the company since the December 2014 conference call.
5. JRJC claims Zhao has never been subject to travel restrictions.  However, a new report by Tencent Prism dated June 4, 2015 claims that Zhao has not traveled since a December 6, 2014 flight from Shanghai to Beijing.  The article also claims that Zhao requested an extended vacation from working at JRJC.  Chinese media reports thus continue to contradict claims made by JRJC.
6. JRJC did not deny that Rongquan Leng found himself in serious legal trouble and was detained.
7. JRJC did not deny that Ling Wang got into serious legal trouble and fled China.
8. JRJC disputed the related party issue regarding the Langfang project, but without providing any evidence.
9. JRJC pointed out Zhao’s purported $7 purchase of JRJC shares from IDG when the stock was below $3 (actually at $1.93 on November 2, 2011, the day Zhao entered into the purchase agreement).  Investors can judge for themselves the likelihood that such a fantastical purchase premium had any real economic substance, or was possibly contingent upon other undisclosed factors.

JRJC’s rebuttal hardly deserves any further analysis, but we did take a closer look at one key point that states:

… Mr. Zhiwei Zhao remains the CEO and Chairman of the Company.  The changes of legal representatives and management positions in affiliate companies are a normal course of action.  This happens in many companies. Geoinvesting’s reading and analysis aimed to feed into their speculation that Mr. Zhao is in legal trouble.

Since Zhao remains the Chairman and CEO of JRJC as the company claims, why would Zhao resign from important positions in JRJC’s key VIE subsidiaries in the past few months?  We are puzzled that JRJC considers that “The changes of legal representatives and management positions in affiliate companies are a normal course of action.” How can Zhao’s resignation from key entities that operate JRJC’s core business (i.e. Beijing Fuhua Innovation Technology Development Co. Ltd., which is the VIE that owns JRJC’s flagship web portal, jrj.com, and Shanghai Meining Computer Software Co., Ltd., which owns other JRJC’s flagship web portal stockstar.com) be considered part of the “normal course of action?”  Did it not occur to the company that it should disclose these pieces of material information to its shareholders?

Further, we’ve found it rare that the Chinese media is quick to respond to these kinds of allegations against Chinese companies – and we find it even rarer that they ask the same critical questions that we have. In this case, Tencent’s conclusions seem to back ours. Since the company is now not just under scrutiny from U.S. investors, but also from media in its own country, this would seem like a good time to stand up and clearly explain what, exactly, is going on at China Finance Online.

VIE structures present enough risk in and of themselves to U.S. investors, that when the person who is at least partially, if not fully, controlling these VIEs resigns from them as legal representative, director, and/or manager, we believe it is the company’s obligation to disclose these changes to investors.

Based upon all available information, we remain convinced that Zhao is in some type of legal trouble.  JRJC did not deny this possibility in its rebuttal, nor did JRJC offer any first hand evidence that Zhao is still running the company.  The Chinese media have not been able to interview Zhao since December 2014, a point that Zhao could instantly resolve if he simply spoke to the media. Based on these facts, we conclude that JRJC’s response has fallen flat in its entirety.

Disclosure: Short JRJC