China MediaExpress Holdings (ticker: CCME)
Fraud was pervasive and out in the open. We would ask our investigators to go visit a facility and they found it wasn't operating. I was shocked. We then approached our China attorney and asked for these filings that companies make to the SAIC, the State Administration for Industry and Commerce.[snip] Some six months later, China MediaExpress' auditor and some directors resigned. It stopped reporting to the SEC.Lotus Pharmaceuticals (LTUSE)
they had indicated that they spent $32.7 million on land in Inner Mongolia. We had an independent appraisal done on the land and it appraised for less than $7 million. [snip] Lotus later returned its Mongolian assets to the previous owner for no cash, and recently said that it can't afford to employ an auditor. It has stopped reporting to the SEC.China Redstone Group (CGPI)
they said they owned a cemetery. They didn't own it. They didn't have a license to operate it. We had government documents that showed that it was owned by another entity. [snip] China Redstone's chief financial officer resigned, and it, too, has stopped reporting to the SEC.Subaye (SBAY)
[It was] a cloud-computing company that claimed to have 1,539 employees at a certain location. We sent our investigator there. [snip] He stood outside for two days and watched the employees come in and out. Then he called and said, "There's a problem. They have many fewer employees there than they claim." And I said, "Okay, they say they have about 1,500. What are we looking at, half that?" And he said, "No, 40 to 50." The investigator also talked to the community at large. The local people would tell you, "You are not here on the wrong days. This is really how many people come in and out of there." So we published that report and Subaye got delisted. The CFO resigned.In every instance it was Dan David's investigations that resulted in the de-listing. The Chinese regulatory regime circled the wagons:
they are requiring you to get a "statistics license" to do investigations in China—at the risk of criminal charges. [snip] SAIC employees now ask who you are and why you want these filings. Then they alert the company.The Chinese market is too large for major companies (think Apple and Ford) to ignore. However, these companies can afford the due-diligence expense.
Retail investing in Chinese stocks is a different story. Fraud is too pervasive for this small investor. I'm staying away.