Role of Fraud Investigator in the rise of the short seller ...

Union Registrars30 April 2021

Role of Fraud Investigatorin the rise of the shortseller attacks

© 2021. For information, contact Deloitte China. 2

Speakers

Juvenia HoPartner, Deloitte Forensic | Financial AdvisoryJuvenia has over 20 years of experience specializing in forensic accounting, fraudinvestigations, litigation support and fraud risk compliance review throughout GreaterChina. She has vast experience in investigating with Chinese companies listed in Hong Kongand overseas, including internal corporate investigations related to allegations made byshort sellers, internal control review, financial due diligence and restructuring.

Her extensive forensic accounting experience includes investigation into white collar crime,corruption particularly in the context of Foreign Corrupt Practices Act and moneylaundering, asset tracing inquiries, bribery & corruption risk assessments.

Royce TsangManager, Deloitte Forensic | Financial AdvisoryRoyce has extensive experience in areas including fraud and corruption investigations,litigation support, FCPA Compliance, Export Compliance, policy and procedures review,compliance and internal control reviews.

Royce has also been on secondment in the Enforcement Division of the Securities andFutures Commission, focusing on tackling misconduct by listed companies and theirdirectors who abuse their positions and shareholders' funds.


1. How does the Short-seller Operate?

2. The Recent Short Sellers’ Attacks

3. The Luckin Coffee’s Scandal

4. The JOYY’s Short-seller Attack

5. Consequences of the Recent Attack

Contents

P. 3

P. 6

P. 9

P. 16

P. 20


How does short sellers operate?

Short seller borrows 10 shares of ABC stock

Short seller sells 10 shares of ABC stock for $500

Broker Short Seller Market

Short seller buys 10 shares of ABC stock for $400

Short seller returns 10 shares of ABC stock and keeps $100

Stock loses value

Naked Shorting

Role as Fraud Detectors

Short sellers will proactively public negative information to make the stock price drop.

How do short sellers locate

their target?

Unusually high growth in profitability and receivables

Company with poor internal control

Board Independence (e.g. CEO same as Chairman)

Compare financial indicators with industry or company’s past result

1 2

3

45


Who are the Short-sellers?

Fraud detector

Identify overpriced stocks&

business misconduct

Improve market efficiency

Abusive tradingstrategies

Damper investor confidence

Decrease market liquidity


Impact of Short Sellers’ Attacks

Immediate Impact

496.HK91%

6863.HK

85%1548.HK

47%

0400.HK22%

IQ

14%1378.HK

10%

Long Term Impact

Reaches million

investors at

anytime

anywhere

With little

accountability

Short

attacks


Hong Kong

The Recent Short Sellers’ Attacks

Date Code Company Short-seller Market value right before short-seller attack

29-Jan 1177 Sino Biopharmaceutical (中國生物製藥) GMT Research HKD 144bn

6-Feb 867 China Medical (康哲藥業) Blue Orca Capital HKD 25bn

26-Feb 992 Lenovo (聯想集團) Bucephalus Research HKD 65bn

3-Mar 3883 China Aoyuan (中國奧園) Anonymous HKD 29bn

17-May 1636 China Metal Resources Utilization（中國金屬利用） Hindenburg Research HKD 9.5bn

27-May 819 TIANNENG POWER INTERNATIONAL(天能動力） Cloudy Thunder Research HKD 10.4bn

22-Sep 1179 HUAZHU GROUP LTD（華住集團-S） Bonitas Research HKD 100bn

12-Nov 3826 China Harmony Auto Holding Ltd（和諧汽車） Bonitas Research HKD 5.3bn


United States


Date Code Company Short-seller Market value rightbefore short-seller attack

31-Jan LK Luckin Coffee (瑞幸咖啡) Muddy Waters Research USD 9bn

5-Feb LK Luckin Coffee (瑞幸咖啡) Ash IIIuminations Research USD 9bn

13-Feb WUBA 58.com (58同城) Grizzly Research USD 9bn

20-Feb CAN Canaan (嘉楠耘智) Marcus Aurelius Value USD 0.9bn

24-Feb GSX GSX Techedu (跟誰學) Grizzly Research USD 10bn

4-Mar JKS JinkoSolar (晶科能源) Bonitas Research USD 1bn

7-Apr IQ iQIYI (愛奇藝) Wolfpack USD 12bn

10-Apr GDS GDS Holdings (萬國數據) J Capital USD 8bn

14-Apr GSX GSX Techedu (跟誰學) Citron Research USD 7bn

7-May GSX GSX Techedu (跟誰學) Scorpio VC USD 10bn

18-May GSX GSX Techedu (跟誰學) Muddy Waters Research USD 8bn


United States


Date Code Company Short-seller Market value right before short-seller attack

25-Jun SSC Ideanomics Inc.（優點互動） J-Capital Research N/A

25-Aug LX LX（樂信） Grizzly Research USD 1.5bn

22-Sep HTHT HUAZHU GROUP LTD（華住） Bonitas Research USD 13bn

22-Oct SPI SPI ENERGY CO., LTD（陽光動力） Grizzly Research USD 0.2bn

18-Nov YY JOYY Inc.（歡聚） Muddy Waters Research USD 8bn

30-Nov KNDI KANDI TECHNOLOGIES（康迪車業） Hindenburg Research USD 1bn

18-Dec CBAT CBAK ENERGY TECHNOLOGY, INC（中比能源） J-Capital Research USD 0.4bn

14-Jan DOYU DOUYU INTERNATIONAL HOLDINGS LTD（鬥魚）Grizzly Research USD 3.9bn

16-Feb EH EHANG HOLDINGS, LTD.（億航智能） Wolfpack Research USD 5.8bn

26-Feb SOS SOS（艾斯歐艾斯） Culper Research USD 1bn

6-Apr EBON Ebang International Holdings Inc.(億邦國際) Hindenburg Research USD 1.2bn


Luckin Coffee’s Scandal

Established in October 2017 Listed in NASDAQ in May 2019

Over 4,500 stores in ChinaCoffee Shop Leader in China

Rely on electric payments

Burn cash for market share


0

5

10

15

20

25

30

35

40

45

30-Jan 6-Feb 13-Feb 20-Feb 27-Feb 5-Mar 12-Mar 19-Mar 26-Mar 2-Apr 9-Apr 16-Apr 23-Apr 30-Apr 7-May 14-May 21-May 28-May

Luckin Coffee’s Attacking Timeline

Shar

e P

rice

(U

SD)

Date

2 Apr 2020

Admit fraud29 Apr 2020

15 May 2020

31 Jan 2020

1 Feb 2020

Long position

5 Feb 2020

27 Apr 2020


1 Number of items per store per day inflated


Site VisitsSEC Filings

Revenue

Revenue

Site Visit

92 Full-time1,418 Part-time

11,260 hours of Video

620 Stores 100% OperatingHours

Q3 2019

Q4 2019

69%

88%

Discreet Enquiry

271, 272, 273, 274, 275, 276 …

271, 273, 274, 277, 279 …


2 “Items per order” in a downward trend


10,119 Customers

25,843 Receipts

2,213 Stores 45 Cities

Receipt Analysis


3 “Net selling price” per item inflated


Receipt Analysis

10,119 Customers

25,843 Receipts


ReceiptsSEC Filings

Net Selling Price Per Item

Net Selling Price Per Item

12.3%

ReceiptsSEC Filings

Free ItemDistributed

Free ItemDistributed


4 Overstated Advertising Expenses



5 Inflated Revenue from “Other Products”


Receipt Analysis

10,119 Customers

25,843 Receipts


ReceiptsSEC Filings

Other Products 21.7%3Q19

Other Products6.2%4Q19


JOYY’s Short-seller Attack

Established in April 2005

Leading social media platform in China485.2millions MAU in 19Q4

Over 4 major brands

Listed in NASDAQ in Nov 2012

USD3.6 Billions M&A deal


0

20

40

60

80

100

120

140

160


Shar

e P

rice

(U

SD)

Date

18 Nov 2020

16 Nov 2020 25 Mar 2021

Independent Review Conclusion

on BIGO8 Feb 2021

Independent Review

Conclusion on YY



Researched YY for over an year

Marco data analytics + traditional forensic techniques

Analyzed 115.6 million transactions + 1.2 millions users + 20,000 performers



• Internet VS Traditional industries

Well known accounting & law firms participated

Baidu conducted comprehensive DD before M&A

Too much assumption used


02

18 Dec2020

Bill Approved by the U.S. Senate

The Holding Foreign Companies Accountable Act

Retain Auditors whose foreign offices are fully subject to inspection by PCAOB

Fail to comply for 3 years

Fail to comply

Additional Disclosure

1. Foreign governmental entities owned?2. Board members are Chinese Communist Party?

???Violation of China

State Secrecy Law?


02

20 May2020

New NASDAQ Listing Amendment Submitted

Amended NASDAQ Listing Rule

1. Raise USD25mm in IPO OR2. >25% post-listing market capitalization

PRC Companies listed on Nasdaq since 2000 (Up to 20 May 2020)

<USD 25mm

>USD 25mm40

115 ???

Will no. of PRC

Companies to be listed

on Nasdaq drop?


Impacts

USD 3.88 bn

USD 3.13 bn

USD 3.07 bn

USD 1-2 bn

USD 1 bn

USD 2 bn


Impacts

HK IPO Market

Secondary Listing

PRC giants abandon listing in the U.S.

Short-sellers Attacks

Targets PRC companies

Targets tech firms


What is the value of forensic accountant in forensic investigation?

Clean CompaniesCompanies have fraud issues

REBUILD TRUSTVIA

FORENSIC INVESTIGATION

Provide facts to investors

Quantify fraud exposure


Thank

you

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Role of Fraud Investigator in the rise of the short seller ...

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