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ChinaCast Education Canadian shortseller targets · report said. “ChinaCast appears to be either...
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Canadian shortseller targets ChinaCast Education A Canadian short-seller well-known for his pursuit of China-based companies listed in North America with potentially shady finances has struck again, releasing a report on ChinaCast Education Corp. accusing the company of fraud Jennifer S. Altman/Getty Images
Transcript of ChinaCast Education Canadian shortseller targets · report said. “ChinaCast appears to be either...
Canadian shortseller targetsChinaCast EducationA Canadian short-seller well-known for his pursuit of China-basedcompanies listed in North America with potentially shady finances hasstruck again, releasing a report on ChinaCast Education Corp. accusing thecompany of fraud
Jennifer S. Altman/Getty Images
A Canadian short-seller well-known for his pursuit of China-based
companies listed in North America with potentially shady finances
has struck again, releasing a report on ChinaCast Education Corp.
accusing the company of fraud.
Shares of the company, which is listed on the Nasdaq
(NASDAQ/CAST), plunged as much as 14% Tuesday to a low of
US$4.37 before rebounding slightly in midday trading.
“We believe that ChinaCast is falsifying its financial statements. We
believe that the company’s revenue and profit are materially
overstated in its SEC filings,” said the report from Kerrisdale Capital
Management LLC, founded by Sahm Adrangi.
The firm has passed on its findings to the SEC, auditors Deloitte
Touche, as well as the Nasdaq.
The accusations come at a critical time for the company. On Nov. 15,
ChinaCast’s board announced it had received an unsolicited bid from
a “qualified institutional investor” at a “significant premium” to the
company’s stock price.
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Shares of ChinaCast jumped 36.6% in response.
This changes the dynamic for a shortseller such as Mr. Adrangi, who
stands to lose a great deal of money if the sale proceeds and the
shares do not get massively devalued despite the report.
In the report’s disclaimers, Kerrisdale notes that the firm, its research
contributors and others hold short positions and option interests on
the stock.
Mr. Adrangi, an ex-Vancouverite who now plies his trade in New
York, is one of a select group of shortsellers who have become
experts on China-based companies.
Since Carson Block of Muddy Waters exposed potential fraud at
Sino-Forest Corp. earlier this year, many China-based, North
America-listed companies have come under scrutiny.
So far, Mr. Adrangi has already taken down a similiar company,
China Education Alliance Inc., which he once described as “mostly a
hoax.”
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The company had a US$150-million market value on the New York
Stock Exchange, but now has a market cap of only US$14-million
after Mr. Adrangi discovered one of its training centres, designed for
1,200 students, was practically empty.
ChinaCast is accused of falsifying revenues in one of its main
operating segments.
Between 2007 and 2009, ChinaCast reported revenues of US$10-
million, US$14-million and US$6-million in its Shanghai filings. By
contrast, the company posted revenues of US$25-million, US$29-
million and US$29-million respectively in filings with the SEC, the
report said.
“ChinaCast appears to be either providing false financial statements
to the United States, in order to inflate the value of its stock price and
raise capital from foreign investors, or providing false information to
the Chinese government,” the report said.
As well, the company allegedly misappropriated funds used to pay
for the acquisition of several Chinese business colleges, including in
one case using a farmer as a middleman, who ended up pocketing
the difference.
In 2009, ChinaCast paid 365-million yuan for Lijiang College,
purchased from Shanghai Xijiu Information Technology Co. However,
the report said Xijiu had only paid 182-million yuan a few weeks
before to acquire the college, and the sole owner of Xijiu was a
farmer from Fujian province who did not graduate from high school.
The report accuses a former ChinaCast employee of setting up Xijiu.
ChinaCast has also been censured by the Chinese government in
the past for faking bank statements, the report said.
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Kerrisdale’s accusations have not been proven in court.
ChinaCast provides online education and training services, and is
also the owner of three physical Chinese colleges.
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