(China Green Agriculture story updated to include further details from the J Capital research report.)



) -- Shares of

China Green Agriculture

(CGA) - Get Report

closed 10% lower Tuesday after a small equities research firm issued a report accusing the company of fraud.

The firm, Beijing-based J Capital,

said in its report

that it had found "compelling evidence that China Green Agriculture ... has vastly inflated the sales and profit figures it reports to investors."

China Green closed Wednesday at $8.11, down 10.4%, on volume of more than 3 million shares, six times the daily average turnover in the name.

J Capital cited financial records filed by China Green with a Chinese government bureau called the State Administration of Industry and Commerce, or SAIC. Those filings show that China Green Agriculture's main operating unit took in revenue of $8.4 million in calendar 2009, J Capital said in its report. The company reported revenue for the same period of $41.8 million to the

Securities and Exchange Commission

, according to the report.

>>The Shanghai Numbers: A Special Series by TheStreet

In September, China Green issued a press release defending the accuracy of its filings in the U.S. "It is well documented that reports filed with

the SAIC often do not reflect the comprehensive income and financial condition of a company," China Green said in the press release.

China Green executives weren't immediately available for comment Wednesday, but the company's U.S.-based spokesperson referred


to that earlier press release.

The use of SAIC records to demonstrate fraud has been criticized by long-side investors in Chinese small-caps. Some defenders of the stocks say that different accounting methods are used in China, and that results in the sometimes enormous discrepancies. Others on the long side say that filing accurate records with the SAIC is simply not taken seriously in China.

In its own report, J Capital addressed that contention. "Few companies simply lie on their SAIC filings," the report said. "The government audits company books annually and would rescind the license if such a large discrepancy were found."

J Capital contends that its own research into China Green's business "supports the $8 million figure as roughly accurate." Based on this, the report asserts, shares of the company are worth "no more than $2.85 a share."

China Green has long been a controversial stock. A small organic-fertilizer producer based in the city of Xi'an, in central China, China Green is one of hundreds of Chinese companies that have come public in the U.S. through a process known as a reverse merger.

Allegations and revelations of financial fraud have beset these companies over the last year, and the SEC has launched a probe into those allegations, according to people with knowledge of that investigation. The SEC has declined to comment.

China Green has not been immune to allegations similar to those published by J Capital. Short-sellers active in the Chinese small-cap sector have for some time believed that China Green has been fudging numbers. A report this past summer, for example, also cited discrepancies between the company's SEC and SAIC records.

China Green, which went public in a reverse merger in 2007, has seen its stock trade as high as $18. It reached that point in December 2009, not long after it began trading on the

New York Stock Exchange

. The stock was uplisted to the American Stock Exchange in March 2009 from the over-the-counter bulletin board.

The J Capital report enumerates a series of other allegations, including "dubious related-party transactions," "possible self-dealing," and "false claims about technology."

According to J Capital's Web site, the firm was founded in 2007 to "provide deep-dive analysis" of Chinese companies, both on the long and short side. It sells its research to institutional investors and sometimes takes positions in the stocks it analyzes, according to the firm.

In its report on China Green Agriculture, the firm didn't say whether it had a short position in the stock, although it noted that some of its clients did.

J Capital released the China Green report on its

Web site

. It's the only research note listed in the "recent reports" section of the site.

-- Written by Scott Eden in New York

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