Lesson to be Learned from Puda Coal Case

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There’s no substitute for thorough due diligence. How many times do investors and analysts need to be burned before they realize that? It’s baffling.

Take the Puda Coal case, involving a Chinese company listed on AMEX and now looking at an indictment from the U.S. Securities and Exchange Commission. Yes, the bad guys here were the Puda executives that have been charged. They lied, forged documents, etc.

But for God’s sake, why did anyone believe them?

In some ways, the theft was not the most audacious part of the strange case of Puda Coal, which traded on the NYSE Amex stock exchange in New York. The attempted cover-up, involving a forged letter from a Chinese state-owned entity and a fake takeover offer, were even more brazen.

But what is most amazing is how easy it turned out to be to discover the fraud. It was basically spelled out in documents that were publicly available in China months before American and Canadian investment banks, advised by major law firms, raised the money from investors. But it appears no one bothered to look — not the underwriters and not the auditors.

Seems like some folks did not do their job very well. I can’t say it any better than this guy, credited for discovering the fraudulent activities, who was quoted in the Times:

They charge a lot for due diligence, but they don’t do it.