Hedge Fund Manager John Paulson Fooled By Chinese Stock Fraud?

John Paulson may have seen the housing crash, but he sure didn't see this coming. Muddy Waters (a firm which specializes in exposing Chinese stock frauds) announced coverage on Sino-Forest (TRE.TO), a Chinese timber company, with a strong sell and $1.00 price target--citing massive fraud.

While normally the news of the latest Chinese stock fraud would not merit any comment, the mere fact that one of the most famous hedge fund managers owns shares makes this quite newsworthy. As of the latest 13-F Paulson and Co owns 34.7 million shares which were until today valued at $624 million. At the close of trading today, the stake is only worth $501 million. UPDATE: Sino-Forest is now down to $6. Wow!

The second largest owner of Sino-Forest is Davis Selected Advisers LP, the mutual-fund firm run by Chris Davis that owned 27.3 million shares. I wonder how they are going to break the news to fundholders. Something like "sorry we really fucked up on this one...please don't redeem."

Here are some of the highlights from Muddy Waters' research report:

•Like Madoff, TRE is one of the rare frauds that is committed by an established institution. In TRE’s case, its early start as an RTO fraud, luck, and deft navigation enabled it to grow into an institution whose “quality management” consistently delivered on earnings growth.

•TRE, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995.

•The foundation of TRE’s fraud is its convoluted structure whereby it runs most of its revenues through “authorized intermediaries” (“AI”). AIs supposedly process TRE’s tax payments, which ensures that TRE leaves its auditors far less of a paper trail.

•On the other side of its books, TRE massively exaggerates its assets. We present smoking gun evidence that TRE overstated its Yunnan timber investments by approximately $900 million.

•TRE relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate.

•TRE’s capital raising is a multi-billion dollar ponzi scheme, and accompanied by substantial theft.

The full report is available here
You really have to wonder if there any legitimate Chinese stock companies left. They all seem to be frauds/ponzi schemes. I would not touch these stocks with a 10 foot pole. It seems that in the case of Sino-Forest quite a few big institutions were fooled, not just retail investors.  

Black Swan Insights


1 comment:

  1. Sometime I check out chinese stocks on yahoo finance. I cannot believe the earnings of some of these chinese companies report their totally unrealistic.