China MediaExpress, which operates a television advertising network on buses in China and was created through a reverse merger, were climbing nearly 11% to $15.34 after Cheng wrote in a letter to shareholders that short sellers "timed and coordinated their efforts" in "reckless and baseless attacks" against the company. Short sellers make money from declines in share prices. Last week, Muddy Waters Research accused China MediaExpress of "engaging in a massive 'pump-and-dump' scheme whereby it significantly inflates revenue and profits in order to enrich management through earn-outs and stock sales." Citron Research and Bronte Capital also released similarly bearish reports on China MediaExpress on Jan. 31 and Feb. 1, respectively. Muddy Waters says it has a short position in the stock, and therefore stands to realize significant gains in the event that the price of stock declines.
In his letter, Cheng categorically denied the allegations made in the three publications and lashed out at the alleged short sellers, arguing that a conflict of interest exists for short sellers that taints the objectivity and legitimacy of their research reports. "By using the anonymity of the Internet and publicizing as many unfounded allegations as they can craft, they can make it look as if there is a ground swell of criticism against the company when in reality all the claims emerge from a small group of self-interested parties," Cheng wrote. "As long as they can drive down the stock price when the U.S. markets are open (even if there is a holiday in China) and then cover their short position cheaply and quickly, they have accomplished their goal." Muddy Waters released its critical report on China MediaExpress on the Chinese New Year, when most Chinese businesses are closed to observe the holiday. Both the Hang Seng and Shanghai Composite were closed for trading when the research note was released. Among several accusations made by Muddy Waters, the short-seller claims that China MediaExpress actually has fewer than half of the 27,200 buses it claims, citing data the company provides to advertisers. In addition, the firm alleges that China MediaExpress' management was lying when it announced that it had created an online-shopping platform that has an agreement with Apple ( AAPL - Get Report) or one of Apple's distributors.
In his response letter, Cheng asserted that China MediaExpress does indeed have 27,200 buses under contract, and that the company will engage a professional third party to verify that fact. Cheng argues that the spread sheets on which Muddy Waters purports to rely appear to be authored by an individual unknown to the company and don't match the company's. Cheng also notes that China MediaExpress announced its December 2010 contract with Eading Group, which it says is one of Apple's official distributors in China to advertise Apple products, including the iPad. In direct response to the accusation that China MediaExpress is a fraud, Cheng says the company "is strong and doing well," and that revenue and cash positions have been audited, although he doesn't provide additional confirmation. Like several other Chinese reverse merger stocks, China MediaExpress has seen its share price shredded by multiple accusations of fraud. Despite the rebound Monday, shares of China MediaExpress are down nearly 28% over the past five trading sessions. Other Chinese reverse mergers, including Rino International ( RINO.PK), Orient Paper ( ONP), China Green Agriculture ( CGA - Get Report) and China Education Alliance ( CEU) have been slammed by critics over similar claims that filings made in the U.S. contain questionable or misleading financial statements. In December, TheStreet reported that the Securities and Exchange Commission is focusing on stock promoters, investment bankers, auditors and law firms that have been active in recruiting Chinese companies to U.S. stock exchanges and raising capital for those companies by selling new shares. -- Written by Robert Holmes in Boston. >To contact the writer of this article, click here: Robert Holmes. >To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet. >To submit a news tip, send an email to: firstname.lastname@example.org.