As an American, I usually approach a fight with the expectation of labeling one party the “good guy” and the other the “bad guy.” Sure, a black-and-white world view is somewhat unrealistic and limiting, but if it was good enough for George Bush and Darth Cheney, it’s good enough for me.
A kerfuffle going on in China right now about the practices of certain firms known as “short sellers” has forced me to discard my usual analytic framework in favor of the FRO approach, as in “these guys can all fuck right off.” I think it’s more appropriate given the industry and the folks involved.
First, a quick summary from Marbridge:
A group of 61 Chinese IT entrepreneurs including current former Google and Microsoft executives led by Kai-fu Lee, chairman and CEO of Beijing-based incubator Innovation Works, has established the website Citronfraud.com, arguing that Citron’s modus operandi is select legal corporations with only minor or no issues as attack targets, and make false allegations that cannot be verified by its US readership.
In response, Citron founder Andrew Left said that criticisms leveled at himself by the group amounted to a “personal jihad.”
This jihad makes me want to respond with a jeremiad of my own, but I’ll try to keep this post to a reasonable length.
OK, so on one side you’ve got short sellers like Citron and Muddy Waters. They take short positions, issue critical reports, and hope enough shit sticks to the wall that the stock tanks and they make money. The term “vampire squid” comes to mind, but I believe Taibbi already trademarked that. If some of the crap these guys sling out there blows back on them, well, them’s the breaks. No sympathy from this blogger.
On the other side, you’ve got the poor, innocent Chinese companies that have been maliciously libeled. [Wait, hang on a second, fits of laughter. Right, I’m back. Wow, that was intense. 8.7 minutes laughing so hard that I nearly broke two ribs.]
We can quibble about the accuracy of individual research reports, but if we take the set of US-listed Chinese companies that have been the subject of investigations and litigation concerning improprieties like accounting scandals, we’d have to admit that there is more going on here than short sellers muddying the waters (so to speak) to make a buck. There’s a reason why many, though certainly not all, of these companies chose to avoid scrutiny via the “reverse merger” listing approach and others have blatantly fabricated information. What’s that f-word I want to use here? Oh yeah, “fraud.”
Are some of these companies being unfairly targeted by short sellers? Undoubtedly. But the crying, the wailing, the gnashing of teeth, and rending of garments has failed to elicit my sympathies thus far. Why? They chose to list in the U.S., where a company is free to raise money on the capital markets by engaging in a rigged system that benefits a few to the detriment of everyone else. Fraud and insider trading are only the dodgy practices that are illegal — most of the other ways the system screws over non-institutional investors are perfectly legal. Free free to call me a dirty Commie, but please don’t try and pretend Wall Street is a pure and unsullied example of perfect competition in action.
Companies that do a listing benefit from this system, and at the same time, they open themselves up to whatever shit folks want to sling at them. That’s the “public” part of a public listing, I suppose. And if the smear tactics get out of hand and your press releases aren’t remedying the situation, one can always resort to libel suits, although that would mean extensive discovery and an uncomfortable disclosure of information. Can’t have that, can we?
Thus far, I’m not inclined to speak up for any of these folks. But what about all these “entrepreneurs” out there who are now blasting Citron?
Call me a cynic, but unless I know otherwise, I’m assuming that every last one of them has lost money because of a Citron or Muddy Waters report. In other words, these guys are probably biased as hell, and their statements should be looked at just as closely as a short seller research report. That being said, Kai-Fu Lee’s critique of Citron’s recent foray into the world of search engines is quite persuasive, if you ask me.
Did I mention that I don’t trust anyone?
The term “entrepreneur” sounds much more positive and romantic than “investor.” But at the end of the day, one side is betting one way, and the other side is betting the opposite. We’re dealing here with listed companies, various kinds of investors, and financial service firms. Poor innocent victims? I’m having trouble locating any.
One last group to talk about: the consumers of short seller reports. You know who you are, fund managers and various analysts. And you’re perhaps the worst of the bunch.
Why does the short seller business model work? Kai-Fu Lee’s description is spot on:
[W]hat is despicable is how these short sellers take advantage of the information asymmetry between China and the US, and write reports full of holes and lies, knowing that their American readers have no way of verifying them.
Now, Lee would probably sympathize with these “American readers” and their inability to verify the information they are given on Chinese companies. Granted, it is pretty much impossible for most analysts to follow up on these sorts of allegations, even more so now that the government here has disallowed independent AIC due diligence (see earlier posts here and here).
But I’m not swayed by the sob stories. In many cases, these are the same folks whose initial investment decisions were also made with incomplete and unverified information. Why would anyone, for example, choose to put their clients’ money on the line with a reverse-merger company that is obviously averse to full disclosure of relevant information? Coming back later and complaining about the inability to verify the allegations in a short seller report seems rather hypocritical.
Moreover, no one is holding a gun to anyone’s head and forcing them to sell in the wake of a Citron report. Yes, investors behave like sheep, but the precipitating factor for the stampede (to mix my animal metaphors slightly) must have at least a tiny sliver of credibility. For short sellers, that means a track record that includes a victory or two in the past; alternatively, there may have been red flags concerning a certain target for a long time, and the short seller report merely reinforced what everyone was thinking.
I have to admit that these comments by Citron’s Andrew Left do make some sense:
Citron founder Andrew Left defended his company’s reports.
“Movements only evolve around real threats,” Left said, according to a Wall Street Journal report. He added that Lee has distorted his reports.
“If what I wrote was false, then you wouldn’t need a movement around it. … I am more than happy to defend (my statements) in a court of law,” he was quoted as saying.
Kai-Fu Lee and his compatriots say that these short sellers are full of shit and shouldn’t be taken seriously. But enough folks do just that, and either they have a somewhat credible reason for doing so or, alternatively, they are completely mindless sheep, in which case American markets are so fickle that no one should ever list there again. Or to put it another way, if Citron is a serial liar, won’t investors eventually figure it out, or are they all brain-dead zombies? I’m not sure which is worse.
You might still be thinking, “But surely there must be a few innocent Chinese firms that have been unfairly targeted by nefarious short sellers? Doesn’t that justify the condemnation?”
No doubt there are some bona fide victims out there, and that sucks for them. But that’s what they signed up for, and they are free to fight back with their own media campaigns and/or litigation; perhaps they can hire back the PR guys that helped them with their IPO hype. For everyone else, don’t even bother playing the innocent victim card; I’m not buying any of it.
Maybe I’ve been reading too much Elmore Leonard, but everyone’s got an angle, and none of ’em can be trusted.