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Short-Seller Cuts Through China Red Tape

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Today, Bird sees the world of Chinese small-caps as a kind of no-man's land, where dishonest executives can submit misleading statements to U.S. regulators without fear of punishment on either side of the Pacific. Individual investors are vulnerable and in most cases unaware of the special dangers associated with RTOs, he says.

He found inspiration for his work in the spring of 2009, when he came upon research by Manuel Asensio. Asensio is now managing partner of Mill Rock Investment Advisors, a firm that espouses a balanced approach to investments, but he is perhaps best known as the vocal short seller who runs asensio.com, a Web site that speaks of a "unique combination of proprietary trading and public advocacy of its positions."

Asensio was then boring into a small-cap called China Sky One Medical (CSKI). Based in Harbin City, in northeastern China, the company had merged into a U.S. shell in 2006 and had uplisted to the Nasdaq in 2008, SEC records show. The company described itself as a purveyor of ancient Chinese homeopathic remedies updated for modern consumers.

In several notes published on his Web site, Asensio had attacked China Sky One Medical's products, a cornucopia of curatives and diagnostic tests: dental ulcer sprays, cough-suppression suppositories, anti-depression "granules," magnetic hemorrhoid ointments, and myopia-correcting eye drops. The product line described on the company's web site also includes Angelica Nourishing Blood Syrup, for the treatment of "irregular menses" and "postpartum blood deficiency," and Jieyinling Lotion for Private Parts, for the treatment of "cervical erosion, gonorrhea, syphilis, and so on."

The skepticism rooted in Bird's own trench-level business experience kicked into overdrive. He soon found himself reading China Sky One's annual report filed with the SEC, its 2008 10-K.

Bird looks at financial documents with a nuts-and-bolts perspective. Early experience in the real estate business taught him the value of thorough credit checks. In the theater business -- he says he once owned a string of cineplexes in and around Austin -- he learned a bit about marketing and promotion. "We did popcorn and juju beans and soda pop by the gallon," Bird recalls of his work in theaters. "I know a little bit about high-margin garbage."

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