Short selling: China tech fights back

Just a year ago, nobody was surprised when a US-listed Chinese company was being accused of fraud and lies. One after another, firms that had gone public through reverse mergers were accused by short-selling firms like Citron Research or Muddy Waters to have cooked the books or misled investors.

But now Andrew Left (pictured), the man behind Citron, is under fire himself. Some of the people often counted among the best and brightest in China’s technology industry are ganging up against him, warning of “fraudulent analysts” and urging investors not to listen to him.

“We strongly believe there is a huge pool of legitimate, exciting, and valuable companies in China. Citron and other short sellers’ recent efforts to slam legitimate companies and deceive investors are despicable,” the group of five dozen executives from technology companies, venture capital funds and startups said in an open letter on Monday.

Left, in an interview with beyondbrics, denied all the claims made against him.

On a dedicated website, the Chinese group pledges to host an “on going fight against fraud”.

The list of signatories includes foreign company executives such as Zhang Ya-Qin, the president of Microsoft’s R&D in Asia, and Charles Wu, an IBM Greater China vice president. But one-third of the names on the list are those of venture capitalists and other people who finance Chinese tech start-ups. The push is led by Kai-fu Lee, the former Google China head who now runs Innovation Works, a start-up incubator, and the country’s most prominent tech insiders.

He got the ball rolling a week ago when he ridiculed Citron for a recent report, claiming that the short-seller lacked the most basic understanding of the business of Sohu, one company it was discussing. Left, Lee showed, had mixed up Sohu’s search product, its browser and its Chinese-language text entry tool.

Left said that Lee’s rebuttal was “a strawman. I gave a complete sum-of-the-parts analysis. It was irrelevant to the whole body of work.”

Their initiative against the short-sellers is not surprising. Left’s business model of shooting down many US-listed companies which are Chinese has added to an already challenging environment for fostering fledgling Chinese tech firms.

But the counter-attack is more than just an industry hurting. Things have become a little more challenging for the short-sellers in targeting Chinese companies for a while.

Evergrande, one of China’s largest real estate companies, has aggressively rebutted attacks by Citron and Muddy Waters, another short-seller. Left’s attacks on Qihoo, in particular, have been less than successful. Ever since he started targeting the company late last year, he has been criticised for errors and carelessness in his reports. The company itself has fought back vigorously, and its shares, trading at US$18 at the time of Left’s first report, rather than falling to his target price of US$5, closed at US$22.39 last Friday.

It remains to be seen if the initiative will gain wider traction.

On Tuesday, the new website ran Lee’s fourth open letter to Citron, in which he accused the firm of getting the facts wrong yet again on several counts concerning himself and his fund.

“Citron’s mudslinging on individuals is as unprofessional and false as their mudslinging on companies. Also this reminds them they should answer our questions, rather than bring up irrelevant and wrong information about Dr. Lee,” he wrote.

Left has published another blog post on the debate, and said that “there is a process: these are US-listed companies, so call the SEC, or sue me, I’m a US citizen… I think the reports are accurate. You can always find things to criticise or call careless. You can’t deny my track record.”

Additional reporting by Rob Minto

Related reading:
Made in China, undone in America
, FT
Shorting China: not a no-brainer
, beyondbrics
LA researcher is scourge of Chinese companies
, FT (2011)
The joys of auditing a China short target
, FT Alphaville
Evergrande accused of fraud and bribery
, FT