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Orient Paper: Story Behind 'Fraud' Report

The reason I moved back to China a few years ago was so that I could get the best possible information on U.S.-listed China small-cap stocks.

Days like today are when that decision really pays off because I got to buy Orient Paper (ONP) at an absurdly low price with a high degree of confidence despite (and due to) a recently released short-sellers' report stating that the company is a fraud.

Days like today are also when I realize that the world of investing in China small-caps is a small one -- a very small one.

In January, I toured Orient Paper and produced a video (see below) of the facilities. I liked the company and owned the stock. To my surprise, there were two other Americans present, and to my even greater surprise they happened to be former classmates of mine from the University of Southern California. They are Carson Block and Sean Regan of Muddy Waters Research.

Orient Paper: Factory Tour

As a result of the USC connection, we did quite a bit of catching up on old times. While my purpose was to produce a video of ONP, they were visiting Orient Paper -- according to the company -- to pitch a "paid for" research report that would recommend the stock as a strong buy. I have tried to contact Muddy Waters by cell phone and email Thursday about the allegations but have yet to receive a reply.

During the film tour, my old classmates were kind enough to hold the camera for me a take a few shots of me and of each other. They even asked for copies of the footage. However, their performance was a bit odd during the tour. The word that comes to mind is "perfunctory."

They didn't speak any Chinese to the company (an interpreter was used), and they really didn't ask many questions. At one point, one of them playfully jumped around in a huge pile of scrap paper. No matter how many of these company visits I make, I am always very deliberate in establishing credibility with the company. I try to ask challenging questions that will be focus points for investors (myself included).

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