Share This Page

Probe of Chinese stocks menacing

| Saturday, June 9, 2012, 4:54 p.m.
Controversial Chinese-American financier Benjamin Wey heads up New York Global Group, which -- along with another promoter of Chinese stock, Global Hunter Securities -- says the Chinese Ministry of State Security has arrested investigators that U.S. firms hired to verify information about companies in the People's Republic of China. File photo

Authorities in China have arrested, harassed or investigated researchers looking into possible fraud by Chinese companies traded on American stock exchanges, the Tribune-Review has learned.

Two major American promoters of Chinese stock -- New York Global Group and Global Hunter Securities -- say the Chinese Ministry of State Security has arrested investigators that U.S. firms hired to verify information about companies in the People's Republic of China. The fate of those arrested is unknown.

Their allegations about law enforcement actions toward researchers are supported by at least one Chinese mining company, Silvercorp Metals Inc., which reported that U.S.-led researchers have questioned its accounting books.

Two American hedge funds, Absaroka Capital Management LLC and EOS Holdings LLC, also reported their researchers in China were arrested and/or threatened with death by thugs, police or both. The status of the Absaroka researchers is uncertain; three EOS workers were arrested and detained for five days. Though all three were released, two of them are under government-imposed travel restrictions.

New York Global, headed by controversial Chinese-American financier Benjamin Wey, said in a statement posted on its website in May that Chinese authorities arrested "several individuals who had been paid by identified short-seller hedge funds to supply fabricated data" on Chinese firms. By borrowing shares to sell, short sellers profit as a company's share prices decline.

New York Global said the much-feared Ministry of State Security "uncovered extensive evidence of collusion" among short-selling American hedge funds that intend to harm Chinese companies.

If China's security ministry is involved, "that's a big deal," Ethan Gutmann, an official with the Foundation for Defense of Democracies and formerly with the Brookings Institution, told the Trib. It would point to a decision made at a high level, he said.

Wey, a naturalized American citizen, is deputy director of the China Mergers & Acquisitions Association, a group of leading Chinese business, financial, accounting and legal officials, some with ties to China's communist party leaders.

In confirming arrests are being made for espionage, Global Hunter said the actions by Chinese officials could mute efforts to find problems with the operations of Chinese companies, or even reverse criticism of Chinese firms in the West.

Rui Feng, chairman of Silvercorp Metals, said last fall that researchers for Americans maligned his company. The company said it "has been advised that Chinese law enforcement agents have opened a criminal case to investigate and find the creators of false and fraudulent reports."

Silvercorp sued several hedge funds and individuals in New York Supreme Court for libel.

More than a 'little' problem

One defendant is Las Vegas-based hedge fund EOS, run by Jon Carnes. He and others have written about Chinese stocks in a blog under the pseudonym "Alfred Little."

In the Silvercorp suit, "Alfred Little" argued that it wanted to keep its authors' names secret because its investigators were run off roads, kidnapped and threatened with death in China. Carnes, whose identity surfaced, told the Trib that Chinese authorities still threaten two of his investigators.

In a web posting, Wey said Carnes, his wife and "several others are currently fugitives in China."

Zhoa Junwen, a lawyer for hedge fund Absaroka Capital, said in a court affidavit that he received threatening phone calls after trying to examine the company's Chinese records. He said he was told to stop his investigation or face unstated consequences.

Chinese officials have had previous differences with Nasdaq.

Five years ago, the security ministry detained Lawrence Pan, Nasdaq's chief representative in China. A 2007 U.S. embassy cable from Beijing to Washington, released by Wikileaks, said the Chinese released Pan -- an American citizen -- only after he apparently promised to restrict media access on the New York floor of the Nasdaq exchange to Falun Gong-operated New Tang Dynasty News network. Later that year, the network was evicted from the Nasdaq floor.

Higher callings?

The intervention of the Ministry of State Security, as reported by Wey and Global Hunter, isn't the only sign that China's central government likely is behind the arrests.

Another event that raised experts' eyebrows was widespread publicity in China about a letter that an economic official from the northeast Chinese province of Liaoning sent to the Obama administration in January.

Liaoning official Chengfan Shan wrote to U.S. Commerce Secretary John Bryson and U.S. Trade Representative Ron Kirk, condemning Nasdaq and asking the Obama administration to "investigate, condemn and curtail any discriminatory activities that are harming Chinese companies."

Nasdaq delisted several Liaoning companies, including Rino International Inc. and A-Power Energy Generation Systems Ltd., that were hit by investor fraud suits.

Shan's letter drew special attention to Liaoning-based CleanTech Innovations Inc., a company represented by Wey.

The communist People's Daily, the Beijing-based mouthpiece of the Chinese Communist Party, the Chinese government national news service Xinhua and several other Chinese publications quickly publicized Shan's letter. The People's Daily and Xinhua published the stories in Chinese and English, a sign the government assigned importance to the matter, experts say.

Derek Scissor, senior research fellow at The Heritage Foundation in Washington, told the Trib that provincial officials in China can be aggressive in defending their turf but the publicity Shan's letter received indicates it had higher approval.

Others agreed.

"I am not sure Shan could write to such figures (as U.S. Cabinet secretaries) of his own accord, without the backing of a higher-level institution or figure," said Flora Sapio, a legal scholar at the Chinese University of Hong Kong.

As further evidence that Shan's letter carried high Chinese authority, Sapio noted that after Shan sent the letters, he was promoted to deputy director of the Liaoning Office of Justice and director of the province's Prison Administration Bureau.

Speaking from London, Gutmann said Shan's new position takes him to a top spot in a troubled prison system that is of central interest to those in power. China's prison system has a reputation for mistreating political prisoners.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.