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China MediaExpress in a Bind Against Shorts

Rick Pearson is a Beijing-based private investor focusing on U.S.-listed China small-cap stocks. He is a contributing writer to TheStreet whose views on these stocks are independent of TheStreet's news coverage.

BEIJING ( TheStreet -- In China's small-cap space, the short-attack phenomenon is relatively new, so it is hard to know what the long-term effects will be on individually attacked stocks or on the space as a whole.

China MediaExpress (CCME) is the latest company to be on the receiving end of a series of short-seller attacks. The stock continues to trade with significant volatility on high volume, meaning that there is still a sizable amount of disagreement between the longs and the shorts.

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I have recently heard of investors "betting the farm" (sometimes on margin) on CCME because they "know" it is legitimate and should seemingly go straight back to $20 or more once it is legitimized. I also have heard from investors who have been aggressively writing puts on the stock because they are confident it will go up, and the option premium they receive looks relatively high.

I don't have a position in CCME, but I do have several observations, which are largely based on the post short attack performance of other China small-caps, including Orient Paper (ONP - Get Report).

Orient Paper was the subject of several short attacks beginning in June 2010. The company's share price fell by 50% in two days to around $4 for a 75% decline from ONP's 2010 high.

Of all the short attacks so far, I believe ONP's response was the most thorough and aggressive. The company responded with a point-by-point rebuttal of the short seller's key points, conducted an independent investigation headed by Deloitte, and just this week completed the appraisals of its equipment, which were a key point of the short reports.

In addition, numerous investors in ONP, including TheStreet reporter Eric Jackson, Wall Street Media and myself, visited the company's facilities and provided photos of new and existing equipment, employees, trucks and lots of paper being produced.

All of this was in direct contrast to the claims by shorts that ONP was effectively an empty shell that had absconded with the proceeds of a recent financing. The problem is that nobody cares. The share price currently sits at around $5, around 40% below pre-attack levels, and is also below the $5.50 level, where it sat before the investigation results were released.

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