During his recent interview with Tobias, Sahm Adrangi of Kerrisdale Capital discusses how he came across a number of successful opportunities in Chinese reverse merger frauds. Here’s an excerpt from the interview:
Tobias Carlisle: So the first one that you’ve wrote about was China Marine. Do you remember China Marine?
Sahm Adrangi: Yeah. China Marine food was the first one. And the reason that was the first one, I mean, there were a lot of these companies, right? And, one of the sort of my bigger breakthroughs and sort of discovering that they were committing fraud was, back then there wasn’t SumZero for real. I mean SumZero existed, but nobody really wrote anything substantial on there. What was actually a great area to just sort of talk about stocks was Yahoo Finance. And so I was sort of just always reading the Yahoo Finance. I was just doing my diligence on these Chinese reverse mergers. But you’re getting the Yahoo Finance message boards, and there was this one guy who was writing under a screen name turned out to be a 70 year old businessman in Austin, Texas that just liked to trade stocks on his own.
Sahm Adrangi: And he started doing this work where he was pulling these Chinese filings from China, and the filings from China were showing like $1 million of revenue, whereas the US filing was showing a $100 million dollars of revenue. And I started doing the same thing for a bunch of companies for like 10, 20 companies that I’d been looking at. And China Marine was one of them where it was reporting a couple million dollars versus the $100, $200 million, that it was reporting it in the US. The reason I did China Marine first was because as part of my diligence, I wasn’t simply just weeding docs. I was going to the conferences and I was just trying to talk to people. I was trying to talk to the bankers that did these deals. I was trying to talk to the sell side analysts, and one of the folks, one of the groups of Industry folks that I was trying to speak with was the pipe funds that seem to be the original seed investors in a lot of them.
Sahm Adrangi: And I was sort of like looking for these guys. It was a very small handful of pipe funds. Most people wouldn’t recognize them. But I ended up getting a lunch with one of them, and I was 28, 29 at the time. I managed 300,000, $400,000 now, maybe $360,000 at this part, after my returns until I was nine. And I had lunch, and I just started talking to him. I talked to him about these filings I was pulling, he was curious about them and he was behind… He’d seated a bunch of these companies, and I think as sort of the lunch continued, and he got more comfortable, and we started in the raw third, fourth glass of wine. He started like telling me some of the stories that he’d seen in China.
Sahm Adrangi: And, he had a team in China. Sort of, probably was invested in 20 or 30 of these businesses, but he’d seen hundreds of them, right? His team had seen hundreds of them. So he started telling me stories about the fraud. He’d be like, “Yeah, we’d visit this one company, and it was an entire board in a building with like padlocked doors. We visited this other company, and there’d be like nothing in the factory.” And always, the companies where there were blatant fraud were the ones he wasn’t invested in. It was all the other ones that were coming, that were like there [crosstalk 00:07:10].
Tobias Carlisle: The ones that went blatant frauds.
Sahm Adrangi: Yeah. But like-
Tobias Carlisle: And the frauds just not blatant ones.
Sahm Adrangi: But anyway, so he started talking about China Marine Food, and he’d started telling me a few stories about China Marine Food, and I remember their Chinese filings hadn’t matched their US filings. And I had this sort of like pipe investor that was investing in a lot of these, saying, “Hey, this one’s not real.” And so, that ended up being the first one I decided to go forward with. And as I did my diligence, a bunch of pretty funny stuff came up, I remember. Originally I wrote an article that said, “Hey, the US filings in Chinese filings don’t match.” And a whole bunch of things about their margins and their working capital didn’t make any sense. But then as I continued to do research, I realized that their accounting firm was this Hong Kong accounting firm. They only had two partners, right?
Sahm Adrangi: They’re generating 50, $100 million of revenue each year and it’s a two partner firm. And then I started doing more work, and I realized that one of them was in the midst of a lawsuit getting sued by a Danish Investor for defrauding that Danish Investor, by putting that Danish investor into one fraudulent like Chinese private entity.
Sahm Adrangi: Then when that guy lost money on that entity, he’s like, “All right, well, sorry that one didn’t work out, but why don’t we take the money that you had, put some more money in into this second thing and then do a third thing.” By the time the guy had gotten duped four times, he filed a lawsuit against the accountant, and this was the accountant of China Marine Food. And so I’m, I decided to move forward with that one. And, I ended up being a successful trade and that stock declined dramatically, and it was part of an SDC enforcement action. I think a couple of years later, Wheelie brought by the ACC against that company’s US accountant. I think it may have switched from the Hong Kong auditor to the US account, but I think it was subject to an ACC enforcement action to some point a couple years ago.
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