Short-Seller Cuts Through China Red Tape
Shortly after Bird posted China Sky One Medical's SAIC documents on his Web site, he took his information to the SEC. Company executives soon conceded in a public statement that Bird was right, and that the company's filings were in fact inconsistent. The only defense offered was that records filed with the SAIC aren't meant as an accurate picture of a company's total operations, or understood that way in China, but rather are commonly understood to be accurate only in respect to paid-in capital and ownership. Paid-in capital refers to the amount shareholders have invested.
A little less than a year later, in August, the company disclosed that the SEC had started a formal investigation focusing on accounting issues. Recently, China Sky One Medical announced disappointing revenue projections, explaining that suppliers were withdrawing to avoid entanglement with the SEC. The stock was selling for $16 a share in August 2009, when Bird first posted the SAIC documents. It's now at $8.
When TheStreet sought further information regarding SAIC filings from the SAIC, the agency didn't respond. Crocker Coulson, who handles investor relations for China Sky One Medical, offered a comment about SAIC documents from his own perspective.
"They're absolutely worthless as a signpost as to whether a company is a fraud," Coulson said.Several investment professionals involved with RTOs on the long side -- among them Benjamin Wey, head of New York Global Group -- have suggested that discrepancies between financials statements filed with the SAIC in China and the SEC in U.S. are accountable to concern over tax payments, particularly China's value added tax, which amounts to 17% on most commercial transactions. The experts say that Chinese companies underestimate revenues in statements to the SAIC -- or delay the filing of accurate statements -- to hold their taxes down. The notion that SAIC filings are largely meaningless finds little support among some experts. The Shanghai-born-and-raised Gerry Wang, CEO of a containership company in Vancouver, says his extensive network of friends and colleagues in China view accuracy in SAIC filings as an imperative.
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