GEO Investing

-transcript from

Over the past year, US-listed Chinese stocks have been thrown into a credit crisis amid a series of financial frauds. Many were suspended and delisted. The president of a delisted high-tech firm in northern China, who prefers to remain anonymous, has shared his views of the whole process of being listed and delisted.

The president claims his company was dragged into the listing process and naively trusted a host of exploitative government officials, bankers, and auditors, only to be torn apart later:

I was a low-level worker for a long-time and know almost nothing about capital markets. I could only tell them: I don’t understand a thing of what you said, but you are referred by my friends, which makes us buddies. We’ll do what you say.

The original Chinese-language article is by Yuqun Zhang of the South China Weekend. iChinaStock has translated the full account of the president of the delisted firm:

Twenty hours after Muddy Waters released its bearish report, I returned to China from New York, exhausted. One week later, one day near the end of 2010, I “admitted” to the American audit company that part of the contract had some problems. Afterwards, I was inundated by phone calls, most of which is condemnatory.

“How badly did this hurt you and the 500 employees of the company?” the Mayor asked me over the phone. Once I wearily arrived at his office, the 56-year old mayor approached me and asked a bunch of questions.

Six months later, I still didn’t have an accurate answer to the question. During this time, I experienced the toughest test since I started the business, and I nearly failed to pass it. In the wave of skepticism towards small-cap Chinese stocks, some startup companies, that went through the assembly line of reverse merger, have been jointly hunted down by American capital market participants that short us, and my company was unlucky to be one of the earliest that was delisted.

If none of this had happened, my company would still have been a star company with great potential. I have started from scratch. Since its foundation in 2003, in as little as 7 years, the company has risen as a star in the field that doesn’t have much competition. In the past four years, the company’s revenue has grown at a rate of 100%.

But all of this came to a grinding halt with the Muddy Waters report. After being delisted, several big contracts could no longer be honored due to credit damage. In the past, many presidents of banks would pay special visits to me and offer large amounts of credit. Now, each bank has issued risk warnings on my company’s credit. When I call them now, they won’t even answer.

Not only me, but the employees have been nervous in the six months after the company was delisted. After the Chinese New Year, an independent investigating group from Deloitte stayed in the company for 45 days and met every single employee face-to-face. This had a great impact on everyone. Many employees resigned due to the rumor that the company was going bankrupt. This forced me to spend more time and efforts communicating with management and I even had to promise to pay 5-years of salary in advance to make them stay.

Politics pushed me to go public

Four years ago, local government officials enticed us to go public. There are two important items on the political achievement list for Chinese government officials: 1) the amount of investment that was attracted; 2) the number of public companies.

Pushed forward by the officials, I made contact with several agencies from Hong Kong and US and signed a letter of intent to go public. (If I had a time machine and I could choose again, I would definitely say no to these capital brokers.) The companies’ names sounded reputable, like “Douglas Company”. It wasn’t until later that I learned they were just small companies.

These capital brokers strongly advocated benefits of reverse merger in US: low costs and fast financing. They also stressed that they were very good at it. In the recent few years, such methods have successfully listed hundreds of similar Chinese companies in the US market.

I was a low-level worker for a long-time and know almost nothing about capital markets. I could only tell them: I don’t understand a thing of what you said, but you are referred by my friends, which makes us buddies. We’ll do what you say. Later on, with their help, my company adopted the roundabout way of the reverse merger, bought a US shell company on the OTCBB, and got that listed on the US market.

A leading financial advising company showed us service agencies throughout the value chain, including auditors and investor relations firms. Those auditors and law firms sounded very well-established. When I met people in the companies, I found they were all Chinese-American (I didn’t know until later that they were just very small, little-known and non-trustworthy agencies.). The first thing the accounting firm that issued auditor reports for us did was charge us hundreds of thousands of dollars and only then were they willing to sign. The infamous accounting firm later shirked their responsibility during the crisis and pushed us deeper into the abyss.

Four CFOs in two years

An outsider may view going public as a glorious hallmark. But as the one who steers the wheel, it only meant I had to shoulder more responsibility. I had to face numerous foreign investors with blue eyes and high noses. I had to fly to America once every month to meet every single investor. In order to save money, we flew in business class. Each flight took more than 10 hours and our legs were swollen. When the time came for us to fly to America every month, we had to have a lot of determination. On these international flights, the first-class coaches were full of investment bankers and lawyers, who were the biggest beneficiaries of the ever booming US-listings of Chinese stocks during the past five years.

I had to have meetings in the US for three days every month. Plus time spent traveling, I spent a whole week speaking to investors while recovering from jet lag. Oftentimes I was too busy to eat dinner. So I brought a full box of instant noodles with me every time. Although I did not feel very comfortable attending meetings with foreign investors, they always told me that I must. If I didn’t, the stock would drop, investors would think that you didn’t care about them, or the company itself might have problems.

Even in China, I rarely had much leisure time. In the past two years, China has become the Mecca for global investors. Each week, investors and agencies come to China to have meetings and visit the companies. I couldn’t say no to any of them, otherwise they would write reports saying we were having a hard time. In the end, each foreigner’s face looked the same to me and I was too tired to remember the names and faces.

After transferring from the OTCBB market to the main market, we employed another set of agencies. At that time, we didn’t know how to find good lawyers or auditing companies. The agencies we hired were all introduced to us by American investors. Then we signed the contract, illustrating the amount of monthly payment and nature of the tasks. After going public, we were criticized for having 4 CFOs in two years. This was because over a long period of time, even though we utilized relations with headhunters, friends and investors, we couldn’t find one single CFO who was familiar with the American capital market and willing to stay in our city (a satellite city near Dalian, Manchuria).

The sheep in the capital market

In the first quarter of 2010, our company set a new sales high, which was no big surprise. Compared to 2009, sales grew over 30% and stock price jumped to the historic high. But unexpectedly, despite this prosperous appearance, a crisis was building up.

To those Wall Street hunters who short stocks, high-price small-cap Chinese stocks have always been their game. While I was attending a board meeting in US, almost with no sign, a research institution named Muddy Waters issued a report on our company, claiming that they had found on a tax confirmation document of a local tax agency in 2009 that we had exaggerated our sales revenue and that our clients and contracts did not exist, after they called several of our clients.

Muddy Waters’ seemingly impeccable report threw investors into fear and caused the stock price to plummet over the next week. It dropped 60% until we suspended trading. The exchange also sent a delisting announcement, saying that unless we provided trustworthy evidence, the company would be directly delisted.

I immediately understood that some bearish institutions had engaged us. On the day when I read the report, I booked the next flight back to China. At the time, I had received millions of phone calls from shareholders, lawyers and family, all asking if I was OK, as the rumor in China was that I had been detained in the US.

Muddy Waters is a for-profit organization. They sell research products and services to investors. The majority of their revenue comes from shorting stocks before they issue bearish reports. During that year, Muddy Waters became a star firm on Wall Street by hunting down many Chinese companies.

Surprisingly, when investors were shorting the stock, some Chinese companies drove us towards an even worse situation. From Muddy Waters’ report, I could easily sense the presence of our biggest competitor in China, who hoped to bring us down with the help of Muddy Waters and become the leaders of the field. This has made me really angry.

Telling Muddy Waters to figure out our sales revenue through tax documents should have been our competitor’s masterpiece. This can obviously convince American investors who are used to tax policies that are completely different from those in China. In China, if our company has already paid sufficient taxes (or accomplished the “assigned tax amount” by the local government) in the fiscal year, the tax department will allow part of our revenue taxes to be levied in the next year. This is a very common financial plan to avoid heavier tax burdens. In addition, in light of the company’s operation, if we don’t have much liquidity this year, we can defer tax payments till next year. Muddy Waters used the tax confirmation documents as the sharpest knife with which to stab us.

However, the last straw that crushed the company was our auditing firm’s report. Four days after the stock was actively suspended, the auditing firm which charged us nearly $300,000 per year gave records of our conference meetings to the SEC. They claimed that I had admitted fraud on the phone and that some contracts did not exist at all.

Those contracts were not fabricated. They were framework agreements with clients. I had stressed to them over and over that framework agreements had uncertainties. But the auditing firm told us that as long as there were agreements, they were effective and should be put in the statements. But when questioned by investors, they denied the rationality of these agreements. Later on, I received the notice of our delisting. During this round of heated battle with capital bears, I felt that I was on a roller coaster that ended up crashing into the ground.

In the past two years, I have never sold one single share of stock… so when many people said that we raised the stock price to drive up our financing, I felt wronged. We are the ignorant sheep in the capital market, sheep that have been torn apart by bearish investors.

(Original Chinese article, Edited & Translated by


  1. GeoTeam


    Yes. I had a good laugh. Like investors were not going to figure this out. Poor baby.. The company was forced to come to the U.S. and raise mountains of money?? Boo hoo. I think the CEOs and CFOs of these firms were as clueless as we all were at one time. The problem is that they still are.

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