We have once again found information that has been released in China and may not have been thoroughly explained and disseminated in the United States. This time it involves Soufun Holdings Limited America (NYSE:SFUN), a real estate holding company that’s headquartered in Beijing, China. Soufun trades under SFUN on the NYSE and at a price of around $7, has a $2.9 billion market cap.  Our diligence has yielded the following:

  • Widespread layoffs at Soufun being reported in China have reportedly come as a result of “faked contracts” employees were involved in creating.
  • Other outlets report that Soufun may have had knowledge that these fake transactions were taking place.
  • Soufun has not made any disclosures in the U.S. regarding these layoffs and owes investors and regulators some answers.

We believe the organized information we are presenting speaks to the importance of our unique brand of due diligence and access to information which may not be available in the U.S. We use this information to help investors protect their portfolios in cases just like this one.

China Media Reports Large Scale Employee Layoff at Soufun

We recently uncovered several articles from Chinese media sources, such as this one in SINA Finance, regarding a large scale employee layoff incident at SFUN. When translated, this news report (paraphrased) states that:

“……Up to 1,000 brokerage employees from SFUN’s secondary housing business in the cities of Beijing, Shanghai and Chengdu received a layoff text message from the company on September 28, [2015]. SFUN says it fired these brokers due to faked contracts during their tenure at the company.”

It was also reported in the article that some of the laid-off employees came together to protest in front of SFUN’s offices in the cities of Beijing and Shanghai.

After further research, it seems to us that things may be more serious than they sounded in the initial report. For example, in this article written by Southern Metropolis Daily, it is reported that:

“……part of the brokers told [the reporter] that they want to ‘protest’ because SFUN has known these activities (fake contracts) all the time, which is equal to an ‘acquiescence’.”

We don’t know if the report is true or not regarding SFUN having knowledge of these fake transactions, but if it is true, then SFUN owes an explanation not just to its investors, but to regulators.

Further research led us to some Tieba message board threads (a discussion group platform offered by BIDU), on which former and current employees of SFUN make posts or comment on other people’s posts. Below are some of the posts that we found:

1.

“Deducting salary? Fake contracts? No place to complain? Forced to sign unequal agreement? Everybody complain together, I am from the city of Hongzhou and welcome people who are hurt by SFUN to join the chat group 103229877…..”

2.

“SFUN in city of Shanghai did the same thing to fire employees…

3.

“…I am from city of Nanjing, and am also fired…”

4.

Group chat titled: “SFUN Owes Employees Salary Complain”

A: “The company says if there’s no transactions, then employees will be laid off. I have made no transactions for some time, then the manager called me out to ask me, ‘Don’t you know how to make fake contracts? Download some real estate certificates and IDs online.'”

A: “Then I quit.”

B: “It’s the same in city of Chengdu.”

A: “Haha”

A: “Now [the company] is investigating the fake contracts.”

A: “When the team results do not meet the requirements, the company pressures employees to make fake contracts to boost results. Now that results are up, then [it is] killing the donkey (meaning firing the employee).”

C: “The branch office boss asked to make fake contracts, I am under pressure to get results.”

5.

“Same with city of Shenzhen, do the work for nothing.”

6.

According to the thread, this is in the city of Hongzhou. This protesting banner says:

“[SFUN] forcefully laying off employees, and employees don’t have a place to go”.

7.

According to the thread, these picture are of the SFUN office in Shanghai.

The caption above the picture reads:

“There are more people on the scene, and associate police are getting more officers”

Here are some of the Tieba links that we used to conduct our research. All of the pictures above have been taken from these forums:

  1. http://tieba.baidu.com/p/4085541067
  2. http://tieba.baidu.com/p/4093021972
  3. http://tieba.baidu.com/p/3863974019

In the meantime, we are not guaranteeing that these people or the IDs on these forums are telling the truth (that would depend on the reality of what is actually happening in China right now); rather, we are delivering this information because it’s the type of information that’s sometimes looked over by the mainstream media. Please be reminded that these threads, technically speaking, can be deleted by Baidu (BIDU), under request by SFUN or a government authority. It would not be surprising to us if, in the near future, these threads have been removed.

According to this Chinese article on October 16, 2015, SFUN responded to the media regarding this issue. The article states (paraphrased):

“On October 16, [2015], the department of publicity of SFUN wrote an email to China Business Daily that the firing [of employees] due to fake [contracts] recently is not the first time. In May of this year, broker Liu in the rental business department was found during a routine investigation to have 3 fake contracts out of 56 contracts in month of April, and [Liu] was fired by SFUN. In the same month, the investigation centered in the city of Shanghai sampled transacted contracts and found that three employees, including Chen, conducted photoshopping of ownership information in the submitted contract attachment [to the company], and the photo of three parties [in the transaction] was obtained online. These three employees were also fired due to fake contracts.

Although both parties (meaning fired employees and the company) are holding up to their own argument, SFUN didn’t give the exact number of the employees that have been fired.”

Conclusion

After conducting our research on this issue, we believe that this incident deserves more attention from public investors.First of all, our analysis of the articles online and threads on the discussion boards make us question whether or not middle management could have knowledge of some of these fake contracts being perpetuated. These types of fake contracts are outside the realm of what normal retail investors would be able to research when looking at a company; therefore we believe this should cast a shadow of scrutiny on SFUN.

Our major takeaways from this analysis are:

  • SFUN may be undergoing initiatives to try to prevent further fake contracts in its rental housing business. This incident, however, presents undeniable risk for investors, as the systemic integrity of SFUN’s business appears to be in question.
  • The incidents involving fake contracts may be an indication of management’s weak internal controls. Does SFUN’s management know that contracts have been faked long before this incident?
  • We believe, at this point, it is reasonable for investors to ask whether or not fake transactions have been discovered/exist in any other portion of SFUN’s business.
  • So far, there has been no official press release issued by the company regarding this incident, including the potential effect on the company and magnitude of the employee layoff. It is unclear how much employee headcount has increased since 2014 for the company, but according to the company’s 20-F in 2014 (p.88), SFUN’s total headcount is 11,642 in 2014. It also says that its sales and marketing team is made up of 4,468 employees. If the above report is true that up to 1,000 employees might be fired (not confirmed), then it accounts for 8.6% of the total company headcount and 22.4% of the sales and marketing team, using the company’s 2014 number. Investors deserve to know this information in a timely manner.
  • The large scale layoff of employees might also be due to the company having to cut costs in order to meet the Street’s estimates.
  • It’s unknown whether the fake contracts in question will negatively affect the company’s previous financial statements, but this incident does give us caution about SFUN’s upcoming Q3 report.