Orient Paper Shares Continue to Drop

Orient Paper shares slide even after the Chinese company launches a third-party investigation into a report questioning its revenue.
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BAODING, China (TheStreet) -- Orient Paper (ONP) shares slid Monday despite the Chinese paper company's recent announcement that it had hired a third-party investigator to examine allegations about its revenue.

Orient Paper

shares were down 24 cents, or 4.1%, to $5.65 Monday after the company said Friday it has retained law firm Loeb & Loeb, which plans to work with its audit committee to retain a Big Four audit firm, to conduct an independent investigation into allegations of fraud by a research firm.

In its inaugural research report issued late last month,

Muddy Waters Research

asserts that Orient Paper is a "fraud" and that the company "overstated its 2008 revenue by 27 times."

Muddy Waters' principals, who are short the stock and would benefit by a decline in its price, cited financial statements by He Bei Oriental Paper Co. Ltd, which it claims is an operating subsidiary of Orient Paper.

Muddy Waters went on to allege that most of the $31.5 million that Orient Paper raised between October 2009 and May 2010 "has been misappropriated."

Orient Paper has denied the allegations, claiming that Muddy Waters was incorrect in citing financial statements of He Bei Oriental Paper Co. Ltd, and that the company's operating subsidiary is actually named Hebei Baoding Orient Paper Milling Co., Ltd.

In Friday's announcement, Orient Paper CEO Zhenyong Liu said that he is "confident that this investigation will vindicate the company's financial disclosures to be accurate in all material respects."

Reverse takeovers, like Orient Paper, are considered risky by some investors as they do not face the same regulatory scrutiny as an initial public offering. In a reverse takeover, a private company acquires a public company, avoiding the long review process by regulators.

In addition, China has barred the Public Company Accounting Oversight Board (PCAOB) from examining the auditors of most U.S.-listed Chinese companies. This lack of transparency has led to questions about the veracity of Chinese reverse takeover companies' financials.

Orient Paper said Friday that it has retained Loeb & Loeb and a Big Four audit firm "to conduct an independent third-party investigation into these accusations in order to further reassure our investors of the integrity of our financial statements, business operations, customer and supplier relationships, and the use of proceeds from our capital markets activities."

However, the damage has already been done to Orient Paper's share price. Since Muddy Waters' initial research note was released for free on the firm's Web site, Orient Paper's share price has dropped more than 30%. On July 1, the stock dropped below $5 a share before retracing most of those losses.

-- Written by Robert Holmes in Boston

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