Are You Safe From the Research Vigilantes?

by Cesar Bacani, 12 October 2011

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topics:
Investor Relations Risk Management

tags:
Anonymous Analytics Chaoda Modern Agriculture corporate governance Muddy Waters short-selling transparency

When I wrote my book, The China Investor: Getting Rich With the Next Superpower, in 2002, one of my stock picks was a Hong Kong-listed vegetable grower called Chaoda Modern Agriculture. “It has created its own Chaoda trademark, sells its branded produce in company-owned outlets and third-party supermarkets in the prosperous coastal provinces, boasts net profit margins of better than 60% and has started paying cash dividends,” I wrote.

The subsequent years appeared to affirm my faith. When I wrote the book, Chaoda was trading at HK$1. By April 2008, the market was valuing the stock at HK$10.77 – a gratifying 977% rise. The stock did slide along with almost every company in the world after the bankruptcy of Lehman Brothers later that year, but it came roaring back in 2009. Last year, Chaoda traded at the HK$7-to-HK$9 level.

But the bottom fell out in 2011. As the year progressed, the stock price steadily spiraled downward until trading was suspended on September 26. Chaoda remains in limbo as I write. Its last price: HK$1.10, barely budging from where it was in 2002.

What happened? The proximate cause of the suspension was a complaint filed by Hong Kong Financial Secretary John Tsang with the Market Misconduct Tribunal, accusing Chaoda Chairman Kwok Ho and CFO Andy Chan of selectively imparting material information in 2009 to six institutional investors, which allegedly allowed one of those briefed to engage in insider trading.

Rise of the vigilantes

But, in fact, Chaoda had come up against a new phenomenon that CFOs should be aware of. This is the rise of what I call the research vigilantes, the likes of US-based Muddy Waters Research, which accused Toronto-listed Sino-Forest of overstating the extent of its timber holdings, alfredlittle.com, whose allegations against Nasdaq-listed SinoTech caused the company's CFO to resign, and Anonymous Analytics, which released a September 26 report that accused Chaoda of “lies and corporate fraud.”

Think of them as the WikiLeaks of the business world, bent on uncovering corporate wrongdoing by “acquiring information through unconventional means,” as Anonymous Analytics ominously declares.

On its website (www.anonanalytics.com), the group describes itself as a faction of Anonymous, “a decentralized network of individuals . . . that has made international headlines by exposing The Church of Scientology, supporting anti-corruption movements in Zimbabwe and India, and providing secure platforms for Iranian citizens to criticize their government.”

Anonymous Analytics aims to move “the issue of transparency from the political level to the corporate level. To this end, we use our unique skill sets to expose companies that practice poor corporate governance and are involved in large-scale fraudulent activities.”

One indication of how seriously the research vigilantes’ allegations are beginning to be regarded is the inclusion of the Anonymous Analytics report in the list of reasons advanced by credit ratings agency Moody’s Investors Service in downgrading Chaoda’s credit rating from Ba3 to Ba2 on October 7.

The downgrade followed Chaoda’s failure to release its annual results on September 30, the due date. “The delays breach the Hong Kong Stock Exchange’s listing rules, and introduce further uncertainty in respect of Chaoda’s financial reporting and financial position,” says Moody’s Vice President and Senior Analyst Ken Chan.

“Such negative developments, on top of the ongoing share suspension, the proceedings of the Hong Kong Market Misconduct Tribunal . . . and the allegations from Anonymous Analytics have raised the company’s overall risk profile to a level which is no longer commensurate with the previous Ba2 rating level,” Chan explains.

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