Background: Puda Coal, Inc. (NYSE: PUDA), through its indirect equity ownership in Shanxi Puda Coal Group Co., Ltd., supplies metallurgical coking coal in the People’s Republic of China. Its processed coking coal is used by coke and steel producers for the purpose of making the coke required for the steel manufacturing process. The company primarily markets its products in the Shanxi Province, Inner Mongolia Autonomous Region, Hebei Province, Beijing, and Tianjin.
Why GeoInvesting chose to delve into this story: We noticed that the corporate ownership structure was materially different from the structure that was reported to the SEC. We also observed numerous undisclosed share ownership transfers since 2009 that made us question shareholder ownership of PUDA and its assets, earnings and cashflows.
- The company transferred all of the U.S. shareholders interest to the Chairman and an investment firm in China.
- It appeared that U.S. shareholders only had minimal ownership of Shanxi Coal cash flows; a far cry from the 90% interest in PUDA’s mining operations as portrayed in the company’s filings.
- There were strikingly complex ownership interest transaction histories with respect to Shanxi Coal and Shanxi Puda Mining.
- The Company admitted its wrong doing.
- SAIC filings were main sources used to prove fraud.
Call to Action: Sell short on April 12, 2011.
Results: A $10,000 short investment in Puda Coal (PUDA) stock resulted in earnings of nearly $10,000, with a peak return just shy of 100%.