Article Source: China’s National Business Daily
NDB Reporters YUE Qi, JIANG Ran, HU Feijun, from Chengdu & Guangzhou
Publishing short reports by American research organizations is also referred to as “Whistleblowing”, and this time the whistle is blown on a U.S. listed Chinese company named L&L Energy, Inc (NASDAQ: LLEN or hereunder as “LLEN”).
Yesterday (September 23, 2013), National Business Daily has obtained exclusive information from Dan David, Senior Vice President of an American research organization named GeoInvesting (hereafter referred to as Geo), that this organization has filed a whistleblower report to the NASDAQ and SEC, and has taken the initial step of communication with the SEC in regard to this matter.
The report alleged that LLEN has been defrauding investors through many irregular actions including booking substantial revenue from operations that have been idled. Dan David told our reporter that Geo would not issue a short report on a U.S. listed Chinese company unless the issues with such company reached a level that warranted delisting from the market. Additionally, Geo has collected more evidence that is still not yet public and is in the process of presenting such evidence to the U.S. authorities.
LLEN, on the other hand, has formed an independent special committee and responded publicly, claiming that Geo has made no attempt to reach out to L&L to verify these allegations, and that it will file formal complaints to the appropriate regulatory bodies. Yesterday in an email response to our reporter, Gary Dvorchak, the Vice President of ICR, the financial communication consulting company listed on LLEN’s official website, stated that he had forwarded the email requesting an interview from our reporter to LLEN, but that he did not think that LLEN intended to make any comment considering the current situation the company is facing.
Short Seller Organization “Blowing the Whistle”
It is reported that LLEN was founded in 1995 and in the business of coal mining, washing, coking, and wholesale, with over 1,000 employees. It has production bases in both Yunnan and Guizhou provinces. The company is registered in the state of Nevada, USA, and it has offices in Seattle, WA, as well as representative offices in the cities of Guangzhou, Shenzhen, and Hong Kong in China.
When Geo issued the short report on LLEN in the early morning of September 20, 2013 (China time), its stock price dropped to $1.27 per share, a 38.65% decline. The report concluded that LLEN’s string of acquisitions and divestures of various assets and properties over the last few years is a “bait and switch shell game.”
The reporters also confirmed with Dan David that Geo is indeed holding some unpublished evidence, and the reason that Geo has not presented all the information is to prevent any potential negative impact from happening to the investigators and interview subject personnel. After the short report was issued, LLEN announced the establishment of an independent special committee on its official website, and said that the committee, which consists of 4 members, including a lawyer, a former U.S. official, and a mining expert, would conduct an independent and full investigation into the allegations by Geo. Dan David claimed that these members all have, or once had, relationships with the company and thus it is reasonable to question the independence of this committee. With regard to this matter, Dan David added that a truly independent investigation should be performed by engaging an independent third party of experts or organization, and official documented proof must be presented to counter the allegations.
The Company is Alleged to Engage in Financial Accounting Fraud
In the “short” report released by Geo, there was an executive summary of the investigation results that listed 15 items, each with corresponding explanation and evidence including photographic evidence. Among the allegations there are questionable revenue figures, falsified transactions, and false assets ownership issues. From Dan David’s point of view, the most convincing and most serious problem for LLEN is its falsified revenue booked from its Hong Xing Coal Washing Factory located in Shizong County, Qujing City, Yunnan Province in China. The most powerful evidence that Geo has presented is the official tax payment data of the Hong Xing Coal Washing Factory obtained from the local tax bureau.
“We sent some people to conduct an on-site investigation at these factories, mines, and facilities. The local residents as well as the owners of other factories and mines nearby have also confirmed the shutdown of the Factory”, Dan David told the reporters of National Business Daily.
In LLEN’s financial reports from May 1, 2012 to April 30, 2013, the reporters found that LLEN claimed $8.2 million in revenue (sic – net income) from the coal washing business. The tax payment data for the Hong Xing Coal Washing Factory presented by Geo indicated that it only paid taxes of RMB ￥30,000 in total from January to June 2012, and it had not paid any tax since June 2012. Geo’s report pointed out that the Hong Xing Coal Washing Factory has been idled for more than 1 year since 2012. LLEN announced on August 19, 2013, that it would sell the lucrative Hong Xing Coal Washing Factory, a move that in Geo’s opinion did not make any sense.
What’s worth noting is that, according to the Correction Warning Notice issued by the Shizong County Local Tax Bureau in April 2013, the Hong Xing Coal Washing Factory was being cited for failure to declare and file tax payable on time. The Notice shows that the legal representative of the Factory is Bin Liu, and the enterprise is structured as a sole proprietorship owned by one individual, and the business address is within Lannigou Mine, Shizong County. Another company, also warned for the same violation, was an entity called Yunnan Liwei Taifeng Mining Co., Ltd., an LLEN subsidiary in Yunnan province. This company was also issued a notice of criticism during Qujing City’s 2012 joint annual inspection of foreign-invested enterprises.
Reporters discovered, from LLEN’s own financial reports, that it has two coal washing facilities with 480,000 tons of coal washing capacity. The Hong Xing (sic – DaPuAn) Coal Washing Factory facility is mainly used for the DaPuAn Mine, and the other facility, PingYi Coal Washing Factory, has already been divested in April 2012, with its operations discontinued.
Reporters learned from the village government committee of Walu Village, Xiongbi Town, Shizong County, where the Hong Xing Coal Washing Factory is located, that the Factory was formerly affiliated with Shizong County Lannigou Coal Mine. It was subsequently transferred to a person named Rifu Ma. Ma Rifu later transferred the Hong Xing Coal Washing Factory to a person named Liu Bin. “The Lannigou Mine is still in operation, but the Hong Xing Coal Washing Factory has been idled for a long time. (I) Haven’t seen any production activity since roughly the end of last year and the beginning of this year”, one village committee official in charge with last name of Wang told the reporter. When asked if he had heard of the American company L&L Energy, Inc., before, this official responded, “haven’t heard that this was owned by an American company; this is an private enterprise owned by individuals.”
Doubtful Real Ownership of Coal Mining Assets
Similar to the Hong Xing Coal Washing Factory, Geo’s report claims that the ZoneLin Coking Plant that contributed revenue to LLEN has also been shut down. Geo has been able to verify this situation through a webpage announcing the progress of energy-saving and emission-reduction target tasks from the Qujing City Government’s website. Reporters from the National Business Daily have, through inquiry of the official website of the State Administration of Industry and Commerce (SAIC) of Yunnan province, found that the registration of Luoping County ZoneLin Coking Co., Ltd. has been cancelled, but the Luoping County ZoneLin Coking Plant remained registered. The person in charge of both of the enterprises is Laozhong Yang.
In addition, Geo’s report also claimed that, during the consolidation and reorganization activities within the coal industry in Guizhou province, the Daping Mine was assigned to the Pan County Pannan Coal Investment Co., Ltd., not really swapped to Guizhou Union Energy Mining Co., Ltd. (hereafter referred to as Union Energy) in a transaction previously disclosed by LLEN. Another fact inconsistent with the disclosed information by LLEN, was that the Hezhang County LuoZhou Mine and LaShu Mine should be under LLEN’s name, however, they are actually owned by Union Energy, according to the consolidation & reorganization information results produced by the Guizhou provincial government. The information concerning these mine assets was both verified (by the reporter) inthe coal mining industry consolidation and reorganization public announcements issued by Guizhou provincial government.
LLEN’s financial reports show that the company currently has five mines, including DaPuAn and SuTsong mines in Yunnan province, China and Weishe, Lashu and Luozhou mines in Guizhou province, China. However, based on the coal mines consolidation & reorganization information published by Guizhou province, with the exception of the SuTsong mine, all the other four mines are owned by Union Energy. The SuTsong mine, based on the information shown on the Yunnan Provincial SAIC website, is a mine organized as a sole proprietorship with the legal representative being Yong Yang. This information is inconsistent with LLEN’s own disclosure about this mine being a partnership enterprise.
In the above financial reports, the reporters discovered that as of April 30th 2013, LLEN claimed to have three major mines, with a total of 600,000 tons per annum in production capacity, in Hezhang county, Guizhou province. The total capacity of the three mines is expected to reach 1.2 million tons per year in 2015 after technical improvement and expansions.
In January of this year, the official notices published by the Guizhou provincial government mandated that the main entity used in the mine consolidation process must have a annual designed capacity of at least 1.5 million tons. The Guizhou mines under the name of L&L Energy apparently do not meet this requirement. On the other hand, L&L Energy is also not on the list of “Qualified Coal Mine Consolidation Entities” published by Guizhou Province.
The Value Chain Behind Short Selling
Based on public records, Geo is a website specialized in collecting, analyzing, and publishing information about publicly traded companies, and mainly provides analysis and opinions on small/micro cap stocks. The value chain behind shorting US listed Chinese stocks is composed of multiple parties such as short sellers, short publishers, class action law firms etc. Third party research organizations such as Geo publish reports questioning companies’ performance as a publisher. Once a stock price drops upon publication, short sellers dump the stock, and lawyers represent (shareholders) in class action lawsuits, suing the short selling targeted company for damages.
As for profiting through short selling, Dan David explains, under the legal system of the United States, it is not only legal but also being encouraged. “The short selling wave is just like a process of washing the sands in the wave (Chinese idiom for survivor selection – by washing away the bad and keep the good)”, explained Dan David. In the 2nd half of 2012, after the previous round of shorting, the dramatic rally in US listed Chinese stocks basically showed that the ones that survived the short selling waves are valuable (investments), at least without major problems. “It’s like picking out the bad apples, what’s left must be quite valuable.”
In addition, questioning the reliability of the financial statements has become a common method of shorting US listed Chinese stocks. The short selling organizations typically research the financial data reported to the US SEC by the target company, then compare them to the information filed with the local Chinese SAIC, SAT etc. In addition to the intelligence gathered by following, secret filming, impersonation of certain organizations, based on the understanding of the Chinese government and companies, short selling firms can also obtain SAIC and taxation related information via various channels. As previously reported by other media, some domestic agencies opportunistically profited by selling SAIC information of target companies to short selling firms.
Article Source: China’s National Business Daily
The original article found on National Business Daily’s website is shown below.
每经记者 岳琦 江然 胡飞军发自成都、广州
Article Source: China’s National Business Daily