Short Seller War of Words Heats Up 做空机构舌战升温
It may be a holiday in China, but there’s been no break in an increasingly entertaining war of words between 2 prominent short sellers and the US-listed Chinese firms they have been targeting in credibility-related attacks for more than a year now. The latest chapter in this saga has seen educational services firm New Oriental (NYSE: EDU), the most recent company to come under attack, just release a report saying an investigation by independent auditors found no evidence of wrongdoing related to allegations raised by short seller Muddy Waters. (company announcement) But as it released its report, Muddy Waters itself fired back by attacking one of New Oriental’s independent auditors, who just happens to be China’s richest man and the founder of leading search engine Baidu (Nasdaq: BIDU), Robin Li.
Before I go any further, let’s go back about a month ago when, after more than a year of attacks led by Muddy Waters and another short seller named Citron, embattled US-listed Chinese firms finally launched a counter-offensive led by Lee Kai-Fu, one of China’s most prominent Internet leaders and a former head of Google (Nasdaq: GOOG) in China. (previous post)
Lee, who took specific aim at Citron, said some of the early short seller attacks were justified and exposed problems at many US-listed Chinese firms that were practicing creative and often misleading accounting. But he went on to say that more recent attacks were becoming increasingly baseless and gratuitous, and were unfairly prolonging an investor confidence crisis that has ravaged share prices for many US- and Hong Kong-listed Chinese stocks for more than a year.
Before this exchange broke out, New Oriental had disclosed in July it was being investigated by the US securities regulator, and speculated the probe may have been related to potential misleading accounting, causing New Oriental shares to plunge 34 percent. A day later Muddy Waters released its own report raising more doubts about New Oriental, causing the company’s shares to plunge an additional 35 percent. New Oriental responded by launching its own internal investigation into the Muddy Waters claims, with 3 of its independent directors leading the probe, one of whom just happened to be Robin Li.
Now New Oriental has issued a press release summarizing the findings of its own probe, saying the group of independent directors, who worked with an outside consultant, found no evidence of wrongdoing related to the Muddy Waters claims. New Oriental shares jumped nearly 8 percent after it issued the report, though they ended the day unchanged and are still 25 percent below where they were trading when the company first disclosed the original securities regulator’s investigation.
But the story doesn’t end there. Muddy Waters, perhaps feeling its own credibility was coming under pressure, responded to the New Oriental report by launching its own Twitter-based counter-attack questioning the credibility of Robin Li and Baidu. In yet another interesting twist, Lee Kai-Fu, originator of the Chinese counter-attack against the short sellers, re-posted some of Muddy Waters’ attacks against Robin Li on his own microblog on Sina (Nasdaq: SINA) Weibo to show how Chinese companies were fighting back. But then those posts were removed by Sina’s own internal censors a short time later for unexplained reasons.
Obviously Robin Li’s name carries a lot more clout in China than the US, which perhaps was the reason for removal of Lee Kai-Fu’s re-posting of Muddy Waters’ attack. Either way, this war of words is far from over, and the latest exchange indicates the short sellers aren’t going to stand by passively and watch as their own credibility gets undermined by the same firms whose credibility they originally attacked.
Bottom line: The current war of words between US-listed Chinese firms and short sellers that attacked them is heating up, as investors rapidly lose interest in what either side has to say.
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