This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Auditors Play Defense on China Stocks

NEW YORK ( TheStreet) - As the president of an auditing firm closely tied to Chinese companies traded in the U.S., Hamid Kabani faces a steady attack from short sellers hell-bent on proving conspiracy theories all about cooking the books.

Short sellers thrive on bad news, selling stock they have borrowed in hopes they can buy the shares back at a lower price and pocketing the difference. In many cases, they try to drive stocks lower by digging up dirt on the companies. They can be helpful as unofficial watchdogs, but clearly have an ax to grind, and are not infallible.

Kabani says criticism of his company is unfounded and unfair.

"This is a one-sided view that paints everyone relating to China as a villain," Kabani says. "Our problem is that we are in professional services. We don't want to start a mudslinging game with [short sellers] because we won't win."

There certainly is plenty of mud flying in the other direction. The short sellers sling it on web sites, for the most part. They charge that auditors like Kabani are part of a network of investment professionals who get shaky Chinese companies listed on U.S. stock exchanges through tricks with reverse takeovers. The shorts claim that auditors, bankers, and stock promoters then cooperate to float dubious new issues of stock with misleading financial statements, bilking American investors while lining their own pockets -- and those of early investors -- with hundreds of millions in profits.

Prominent on the shorts' list of suspect U.S. auditors are Kabani & Co., Frazer Frost, Goldman Kurland Mohidin, and Sherb & Co., among others. The shorts will sometimes target a reverse takeover company, or RTO, solely on the basis of checking who audited the company's financial statements filed with the Securities and Exchange Commission. None of the auditor firms have faced formal charges of fraud.
The Shanghai Numbers

Sherb & Co. recently came under fire when Kerrisdale Capital, a short-oriented firm, opined on its web site that China Education Alliance (CEU) -- a Sherb client -- was "mostly a hoax." Steve Sherb, managing partner with Sherb & Co., said in answer that his firm takes its responsibilities as auditor of U.S. publicly traded companies "very seriously."

"The allegations against China Education Alliance were by firms or individuals that stated explicitly that they held short positions in the stock," Sherb said.

China Education denied what it called "baseless accusations" and has announced a $10 million share repurchase program.

Goldman Kurland Mohidin partner Ahmed Mohidin, who was formerly employed at Kabani & Co., declined to speak in detail about the Chinese companies his firm audits, but commented broadly that concerns about fraud are overblown.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player
1 of 6

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
CVVT $0.26 -13.33%
CGA $1.83 0.00%
AAPL $113.29 0.00%
FB $91.01 0.00%
GOOG $630.38 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs