China Turns Up Short Seller Counter Attack 中国回击做空投资者
Chinese Internet executives are providing steady entertainment in their recent counter-offensive against short sellers who have attacked their stocks repeatedly for more than a year, with industry elder statesman Lee Kai-Fu now preparing to sue one short-seller over defamation. When the history books are written, Lee, a former high-level executive at both Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG), could well emerge as the white knight that ultimately rescued battered Chinese tech companies.
Those firms have seen their reputations and stocks ravaged for more than a year now by a steady stream of attacks, mostly from short sellers questioning some of their more aggressive accounting practices. The Chinese firms as a group had remained largely silent throughout the attacks, speaking up only when they were specifically targeted by a group of short sellers whose most aggressive members included names like Muddy Waters and Citron.
But that changed last month when a group led by Lee finally spoke out, saying the early attacks may have been legitimate and based on real accounting problems but that the more recent attacks were increasingly groundless and simply coming from short sellers looking to make some quick money by capitalizing on investor fears. (previous post) Lee took specific aim at Citron in his original counter-offensive, and is now saying he will sue the company and its founder, Andrew Left, over defamation that has damaged his reputation. (Chinese article)
At the same time, media are reporting that security software specialist Qihoo 360 (NYSE: QIHU), one of Citron’s latest attack targets, has sent a warning letter to the short seller telling it to immediately stop its “illegal activities” or face further legal action. (Chinese article) While this kind of talk is often empty words, especially in China where the legal system is largely ineffective, I do believe that this time both Lee and Qihoo will follow through with their threats, most likely in the more powerful US court system where Citron would face much bigger penalties.
Lee is a seasoned Internet veteran whose experience working in the US for Microsoft before coming to head Google’s China operations has earned him wide respect in the industry. At the same time, he is savvy enough to know the most effective way to tackle this kind of issue, and I’m sure he has checked with lawyers to confirm if he has a reasonable chance of success in a lawsuit against Citron and Left. That lawsuit would most likely be based on a heated war of words that broke out between Lee and Left after Lee launched his original counter-assault on Citron. That offensive prompted Left to respond by questioning Lee’s integrity by saying Lee was just trying to protect some of the companies he helped to fund.
Meantime, Qihoo is infamous in China for loving to file lawsuits, and in fact is probably the most litigious company in the Chinese Internet space. Accordingly, the company and its vocal founder Zhou Hongyi are probably eagerly waiting to file their lawsuit.
At the end of the day, this new round of aggressive actions are likely to finally quiet not only Citron but also many of the smaller opportunistic short sellers who have helped to prolong the confidence crisis against US-listed Chinese companies. But even if the short sellers bow out for now, the broader group of US-listed Chinese companies may still face lingering credibility problems as a stream of real new scandals continues to break out among companies like education services firm New Oriental (NYSE: EDU) and solar panel maker Suntech (NYSE: STP). Accordingly, look for the credibility crisis to drag on at least through the end of this year before things may finally start to improve in 2013.
Bottom line: New lawsuits are likely to quiet the short sellers who have attacked China stocks for the last year, but credibility problems will linger as long as new scandals continue to emerge.
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