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Investors in Chinese firms left in the lurch

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By Lou Kilzer

Published: Wednesday, April 25, 2012, 3:58 p.m.

No expense appeared too small, no detail too minor.

Business executive clients received first-class treatment at the 2008-11 Rodman & Renshaw conferences at the Le Royal Meridien in Shanghai and the Waldorf-Astoria and New York Palace hotels in New York City.

The late-night entertainment shone: Diana Ross, Janet Jackson, En Vogue.

During the day, the New York City investment bank's conference speakers included such VIPs as former President Bill Clinton, former Vice President Dick Cheney, former Secretaries of State Henry Kissinger and Colin Powell, and former Federal Reserve Board Chairman Alan Greenspan.

Presiding over it all was board Chairman Wesley K. Clark, a retired four-star Army general who joined Rodman in 2006. Later, the company began its mission to take fledging Chinese firms and infuse them with Western cash.

In doing so, a Tribune-Review investigation shows, the company:

• Consistently gave the highest ratings to stocks it promoted, advising buyers to acquire securities when others shied away;

• Used questionable formulas to arrive at faulty stock projections;

• Represented one Chinese company after another that later would be accused of fraud or accounting irregularities;

• Paid top Rodman executives millions while the company's stock plunged.

Most Chinese firms that Rodman represented until as late as 2010 lost more than 60 percent of their value, a Trib analysis found. Others had their value practically wiped out. In the end, investors are left holding the bag, often blaming unseen forces for their travails, according to their online posts.

Now some investors are finding that a legal wall around China prevents them from learning what really happened to their money.

Though Clark canceled an interview with the Trib, former Rodman CEO John J. Borer, the firm's chief of investment banking, acknowledges that many Chinese companies it represented hit severe turbulence.

"A lot of Chinese companies have suffered for a lot of reasons," he told the Trib. Rodman, he added, is not alone in that boat.

Borer said putting money into China always is a "transnational risk" that investors must consider. He noted that most of Rodman's sales are to seasoned investors, not retail customers like "mom and pops."

What happens after the sale is not Rodman's concern, he said.

Rodman & Renshaw is a decade-old company put together by Borer, Vice Chairman Michael Vasinkevich and CEO Edward Rubin.

At the time of its inception, China was beginning a meteoric rise as a world economic and industrial power and Westerners were not certain how to participate in that growth, said Kevin Barnes, a former J.P. Morgan merger and acquisition specialist. The problem: China is a communist country with wobbly rules governing private property, money transfers and securities. It restricted foreign ownership of assets.

Barnes, who heads a hedge fund that frequently wagers against Chinese companies, said that "a lot of lawyers sat around and came up with hybrid solutions."

A key idea they generated was that U.S. and other Western investors could participate through Caribbean and AmericanU.S. shell companies that supposedly controlled real Chinese assets through subsidiaries and partners, said Dan David, vice president of the market research firm GeoInvesting. Chinese officials might approve, the lawyers hoped.

Rodman, which specialized in Western biotech firms, began helping many of those firms find investors.

Signs of trouble emerged early on.

Enabling failure?

In 2008, Rodman raised money for AgFeed Industries Inc., a Nanchang, China, animal feed business with a Nevada address. Records show Rodman raised $10 million for AgFeed on April 17, 2008, at $16 a share, and $25 million a week later at $19.05 a share.

By May 5, 2008, AgFeed reached its high of $20.94 a share. Shares plummeted to $1.61 by that November. Rodman sold $8.75 million worth of AgFeed stock just after the low, and $10 million in 2009.

Yet nothing seemed to stop AgFeed's slide into financial abyss -- not even at least nine "buy" recommendations from Rodman analysts in 2010 and two last year. AgFeed recently traded at 20 to 30 cents a share after a shareholders lawsuit and its Nasdaq delisting.

In August 2008, Rodman raised $21.5 million at $4.25 per share for Advanced Battery Technologies Inc., a New York shell company that owns a British Virgin Islands shell company with interests in Chinese battery companies. Rodman sold Advanced Battery shares four times in 2009 and 2010, raising $87.5 million in all.

Like AgFeed, Advanced Battery tanked. After reaching a high of $4.93 in August 2009, the delisted battery firm traded at about 38 cents. Shareholders sued. One investor sued last year in a federal court in New York, claiming among other things that Advanced Battery fabricated relationships with distributors, inflated profits and paid $1.5 million for a nonexistent firm.

But nothing Rodman has attempted turned into a more spectacular failure than its 2009 sale of $100 million shares of Rino International Corp. at $30.75 each. Based in Dalian, China, its shell incorporated in Nevada and owned a shell in the British Virgin Islands through which it maintained relationships with Chinese firms. Again, delisted and sued for fraud, Rino recently traded between 6 and 23 cents, down 99 percent.

Rodman investors encountered another difficult year in 2010. The firm, solely or in concert with other underwriters, raised more than $1 billion for at least 34 Chinese companies, Securities and Exchange Commission records show. Those shares are down in value to about $300 million today, according to a Trib analysis. Many of the companies that Rodman represented were sued for fraud and delisted, records show.

Big names a draw

Borer acknowledges Rodman's panache for attracting talent might have drawn some investors.

President Clinton gave the keynote address for Rodman's Global Investment Conference in November 2008. The next year, Greenspan, interviewed by former CBS News anchor Dan Rather, was the featured attraction at a Rodman New York conference. Advanced Battery Technologies made a presentation, and Diana Ross sang.

In March 2010, Clinton again addressed Rodman faithful -- this time via closed-circuit TV -- at a gala held at the Royal Palace of the Forbidden City in Beijing. Powell was the keynote speaker. Six months later in New York, Rodman held a conference featuring former Treasury Secretary Henry Paulson. Janet Jackson entertained clients at Radio City Music Hall.

In China in March 2011, former Sen. Chris Dodd, D-Conn., who co-authored Wall Street reform legislation known as Dodd-Frank, was the featured speaker. En Vogue performed.

In September, Dodd attended a Rodman New York conference at which Kissinger, Cheney and others spoke.

None of the speakers responded to Trib requests for comment. Though they talked about general economic conditions, their names benefited Rodman, particularly with Chinese businessmen, in a way that cannot be overestimated, said David of GeoInvesting.

"To a typical Chinese businessman, these people would be very, very impressive," David said. The Chinese, he noted, often make little distinction between government and business.

Barnes called the Rodman conferences "a complete dog-and-pony show. In China, government officials are viewed very favorably. Firms there are very impressed with displays of connectiveness."

David wonders whether the speakers "knew of the deteriorating situation" with Rodman investments. He said he hopes not.

Borer, however, said no one should have been fooled.

Rodman wanted Clinton, other former government officials and popular entertainers "because these people draw crowds."

They agreed to speak "for the money," Borer said. "I mean, they wouldn't do it for the Ku Klux Klan, but they got paid."

In October, Rodman decided to back away from the China market it helped create.

"There were no deals being done," Borer explained.

A Trib investigation found Rodman analysts apparently did not consider such an about-face when pitching stocks in 2010. They almost always gave "buy" recommendations, citing low price-to-earnings ratios on their Chinese stocks. Their target goals for shares frequently were 75 percent or more above then-current prices.

Using traditional price/earnings metrics is simply wrongheaded,cq said David and Barnes. No one should mix risks of truly U.S.-based stocks with those behind the Chinese wall, they said.

Execs made millions

Today Rodman is struggling to keep its Nasdaq listing after receiving delisting notices for failing to consistently keep its share price above the mandatory $1 minimum.

The conferences may be partly to blame. Their cost: $3.4 million in 2009, $10 million in 2010 and $7 million in 2011, according to SEC filings. Last year, the company showed a $36 million loss. Yet senior executives made millions.

Rubin received $2.8 million in 2009 and $5.2 million in 2010. Vasinkevich went from $3.8 million in 2009 to $5.2 million in 2010. Paid as an employee, Clark's compensation dropped slightly, from $293,000 in 2009 to $250,000 in 2010.

Legal woes continue for Rodman's past Chinese stocks. In early April, the SEC charged Rodman-backed AutoChina International Ltd. and some of its associates with fraudulently creating bogus trades to make its stock look active and induce a third party to lend the company chairman $120 million.

One of those enlisted into the scheme, according to the SEC complaint, was a 27-year-old actress who said she earned $15,000 to $25,000 a year but invested $3.7 million in AutoChina through her E*Trade account.

AutoChina said the SEC complaint is "without merit."

 

 
 


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