PERSPECTIVE: Yangtze River Continues Fight Against Short Sellers and Exchanges
In December 2018, Hindenburg Research published a report on Yangtze River Port and Logistics Ltd. (OTC: YRIV). The report was a catalyst that would eventually lower the stock’s share price below the Nasdaq-required $1 mark. Recently, YRIV was forced to delist from the Nasdaq and now trades on the over-the-counter (OTC) markets under the looming specter of the Caveat Emptor skull and crossbones.
Yangtze is appealing the delisting, which sent its shares higher in recent trading action.
Hindenberg Research is short-seller by trade, not a research firm. The company leveled an acquisition against YRIV that is pretty typical of many Chinese companies: YRIV was siphoning money from American markets into management pockets.
This described scam has been called “The China Hustle” thanks to a documentary released in 2018 detailing how China’s mid-market companies use “reverse-takeovers” of dormant American shell corporations to leverage American investors for funding dangling the carrot of China’s growing economy. The film and news outlets cataloged 158 Chinese reverse mergers that underperformed the Halter Index by 75 percent and the median of these reverse mergers lagged behind the Russell 2000 index by 66 percent.
YRIV Fights Back
Essentially, Hindenberg believed they could peg Yangtze as another actor in this “China Hustle” movement. The company even referenced and linked the film in some of their research and Tweets. In response, YRIV promptly filed a defamation suit and put together an independent task force to investigate the claims from an objective perspective. It is rare when the companies take the battle to the courtroom, but it was clear the shareholders had enough of the illegal shorting Hindenburg employed to make money as shares declined after the timely release of the report to coincide with the “China Hustle” documentary. This is a common practice by the short-sellers.
In fact, when filing suit, Xiangyao Liu, the chairman and chief executive at YRIV, who was especially disparaged in the Hindenberg report, had the following to offer in a comment: “We feel as a company the best way to fight the short and distort strategy of our accuser is to operate and litigate. Our assets have been acquired and developed with real cash payments; and, the long-term investment opportunity for profit leveraging our assets will ring true for our investors. This is a long and calculated battle with these short-sellers, and we intend to fight with all of our capabilities using every resource available to us. We have a bright future as a member of the global economy and we look forward to the first steps on a long journey.”
In short, the company feels extremely confident it will be vindicated in the court of law. Starting in May of this year, Yangtze opened its books and provided counterevidence for each claim made by Hindenburg. Here is an example, starting with the short-sellers claims: "Based on these observations, we believe that YRIV is largely a shell which exists to raise more capital for the personal use of its controlling shareholder and chairman."
The company’s refute: “Yangtze is a real and operating Company and is not a sham or a fraud. Rule 405 of the Securities Act and Rule 12-b of the Exchange Act define a "shell" company as one with no or nominal operations, and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. As set forth in detail in the Company's 10-Q filing for the period ended September 30, 2018, Yangtze is actively working to develop the Logistics Center, which will operate on a cluster of six, unused parcels of land…The Company's 10-Q provides that the construction and development of the Logistics Center "are expected to be completed in five years while the total anticipated investment have been divided into three phases…Moreover, under Item 1 of Yangtze's latest 10-Q for the quarter ended September 30, 2018, the Company reported as one of its assets "Real estate properties and land lots under development," with a value of $345,716,051. The referenced "land lots under development" are the Logistics Center (Exhibit "1"). Indeed, the valuation and figures of Yangtze's assets are accurately disclosed in Yangtze's public filings. Thus, the Report's statement concerning the company are false.”
While that is a lengthy description from the court filing, the important point to note here is that if management and company documents were duplicitous then it would behoove the coming to not be so forthcoming. And, of course, if the company wins its case – which they seem confident they will – the potential upside here is high. YRIV was trading at more than $11 per share before Hindenburg’s report hit social media channels and had a market capitalization of $3 Billion at its zenith.
Short Seller Benefits
It is worth noting that Hindenburg has done very little to further substantiate their claims in a court of law, other than to continue to reference the original release. All the company has done so far is send YRIV’s delisting notice to the judge, draw attention to their “opinion-like” disclaimers throughout their initial report, refer the judge to their original disclaimer asking the court to be protected under the court as their words are pure opinion and conclude with the overarching point that Hindenburg’s freedom of speech is being stifled by the defamatory lawsuit.
This case becomes more about how companies fight short-sellers and the clubby nature of the relationship between the broker and the funds who sells shares illegally. Hindenburg orchestrated two separate attacks on Yangtze, and a close examination of the trading action in these attacks shows highly sophisticated attacks using trading algorithms once a position had been established by the fund. Then, this coordinated attack allowed this short-selling team to settle, and extract the money over a two-year period from their own accounts to line up the next victim.
Observers, investors, and market watchers are paying close attention to the details of this case as it represents much more than Yangtze, it represents a renewed need for confidence and good faith investors have trading listed shares on the Nasdaq or NYSE. But importantly, it is a cautionary tale of how listing companies and smaller investors must sidestep short-sellers whose business model is designed specifically to profit by destroying companies and shareholder value in the name of equity research.
(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)