Probe of Chinese stocks menacing
By Lou Kilzer
Published: Saturday, June 9, 2012, 4:54 p.m.
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.
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.
"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.
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