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Orient Paper: Story Behind 'Fraud' Report

In other words, it is my opinion that the purpose of the visit was not to find out information on the company but rather to simply "check the box" and say that they had visited the company to lend credibility to their report.

In one respect, I have to pay very high compliments to my former classmates. Their timing was impeccable. Not only did they choose to launch the report into a tanking stock market, but it also happens that I am not in China at the moment. I am back in the U.S. for the Fourth of July holiday and so am not able to do video tour Round 2 at ONP's facilities. The result of the well-timed report is that ONP has fallen by as much as 50% in two days, from over $8 to as low as $4.11.

I was quickly on the phone to the company, to its IR firm and to other major investors who own the stock. Everyone was equally shocked by the report, and the company vowed to respond immediately. I know a number of investors who have toured ONP, met management, and invested in public and private offerings by the company. The investors have all expressed interest in buying at these levels.

The main focus of the negative report was that ONP had somehow successfully deceived its auditors, BDO, as well as public and private investors, along with Roth Capital, which managed the last offering, and that its actual revenue numbers were a mere fraction of what was being reported to U.S. investors -- i.e., fraudulent.

However, according to the emergency press release put out by the company on June 30, my former classmates were using the wrong data. They were trying to match up the financials of ONP with a Chinese paper company called He Bei Oriental Paper Co. Ltd.. Unfortunately, that is the wrong company, and is in fact a different paper company located in Baoding. The correct name of the operating company is Hebei Baoding Orient Paper Milling Co., Ltd., and according to ONP, the numbers match what has been disclosed in U.S. generally accepted accounting principles. Still, Muddy Waters stated in a release Thursday that "our thesis that ONP is a fraud remains unchanged."

In the new posting, Muddy Waters confirms that the 2009 financial numbers are in fact correct (for example, revenue of $102.3 million) yet stands by other qualitative judgments that ONP is a fraud based on various observations from Block and Regan's due diligence visit.
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