The China Hustle Page #2

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centered

on the political star power

of its chairman,

General Wesley Clark.

In the Balkans, he helped

negotiate a peace

between bitter enemies

and led a multinational force

that stopped

a campaign of terror.

Wes Clark's life is simply

an American story,

but he will make

an extraordinary American president.

First I want to ask you

to just tell us who you are,

and tell me a bit

about your background.

Yeah, I'm retired general

Wes Clark.

Graduated from West Point

in 1966.

Went to Oxford, went to Vietnam,

came home on a stretcher.

Signed as a NATO

Supreme Allied Commander.

I ran for president

in 2003, 2004.

Went into investment banking.

Rodman & Renshaw

had a troubled past.

After years

of management turmoil,

they declared bankruptcy

in the late '90s.

But with a luminary

like General Clark

as their public face,

they'd reemerged

as a respectable-looking bank,

hosting parties

and selling Chinese stock.

They would typically invite

presidents,

ex-presidents, Colin Powell,

Diana Ross, Henry Kissinger.

For an hour or two,

having Henry Kissinger

or George Bush

or Wesley Clark speak--

boy, oh, boy,

like you're going into

some inner sanctum of knowledge,

when, you know,

Kissinger's 90 years old,

talking out his ass.

You can see

what's happening there.

They're renting a name

for an hour or two.

These people all work

for fees.

That's how they make money.

When luminaries speak at it,

more power to 'em.

During the six years

that General Clark was chairman,

Rodman & Renshaw brought

over 40 Chinese companies

to U.S. markets,

with an aggregate value

of over $31 billion.

While Rodman and Roth

made fees

for bringing Chinese companies

to the U.S.,

the real paydays came

when the companies listed

on major stock exchanges

Their analysts would

recommend the risky stocks

as great investments,

and then their salesmen--

like Matt, would push them

on their investment network.

Once the stocks rose

high enough,

the banks and insiders

could cash out,

leaving others holding

the overvalued shares.

The catch was,

listing a company

on the stock exchange

normally required audits

and public vetting,

but the banks found a way

around all that.

They used a backdoor process

called a reverse merger.

It's dollar denominated.

It trades onshore,

the New York Stock Exchange,

the NASDAQ.

It's normally a shell company

that is a public-traded stock

that has no operations

underneath it.

You need to go to Nevada.

A lot of them were there,

that had started off as

mining companies or whatever,

and they were just sort of

sitting there, waiting,

you know, to find

the right partner

who could merge into them.

So you need the shell company.

Here's how

these reverse mergers work.

a Chinese company

looking for a way

into American exchanges

merges with the shell

of a defunct U.S. company

that no longer operates

but still legally exists

and has a listing

on a U.S. stock exchange.

The Chinese company then takes

the shell company's place

in the market.

Presto! You just appear.

You're a stock

that's trading in the U.S.,

and you've got a story to tell.

And no one asks any questions.

Between 2006 and 2012,

over 400 Chinese companies

listed on U.S. markets.

80 percent of them

were reverse mergers.

Our exchanges

are monitoring them.

Our banks are vetting

these companies.

You don't have

to worry about them

because they're

on the U.S. exchanges.

Oh, you're in Hong Kong?

Late on the 30th.

Between 2009 and mid-2010,

the average China-based

reverse merger

was up several hundred percent--

the average!

Could you tell me

what China did last night?

We stuck with

our value-investing approach.

And with that approach

and with our guidelines,

that took us to a lot

of China-based companies.

And we made

several hundred percent

on all of 'em.

Longwei Petroleum,

bought them, $1, $1.50.

We sold, $5, $6,

500 percent profit.

L&L Energy,

bought them for under $2,

sold it between $9 and $10.

Puda Coal, bought them

for around $4,

sold them for around $7,

great company.

China Agriculture, CAGC.

$9, sold them at $28.

All great companies.

We were back.

By 2010,

Dan and the guys

at Roth and Rodman

were making a killing

on the China stocks.

It seemed like

it would never end,

and maybe it wouldn't have,

had it not been

for one earnest young

American businessman

who'd gone to Shanghai to seek

a completely different

type of fortune.

The business I set up

was the first

self-storage business

in mainland China.

It was called

Love Box Self Storage.

World-class.

And we did win an award

for self-storage facility

of the year.

On the way to setting up

that business,

I co-authored "Doing Business

in China For Dummies."

Carson's father,

a stockbroker back in the U.S.,

wanted to invest

in Orient Paper,

a company that Roth Capital

had brought to the markets

through a reverse merger.

The company claimed that

it was doing $100 million

in business a year

and shipping tons

of high-quality paper

all over China.

It was one of

the fast-growing companies

that Roth and Rodman had sold

and that investors

like Dan had bought.

The goal was

to do some research,

make sure that it was legit.

His father would

write up the report.

Again, a fairly easy

to understand

and analyze business

the opposite of

an American software company.

Carson and a friend

went to check out the factory,

but right away,

something seemed off.

It was a country road.

It was in poor shape.

That road could not support

the massive trucks

that would be going in and out

of that facility all day.

Then we got into the factory.

It was a complete dump.

Half the machines were broken,

weren't working.

Garbage rotting

out in the front yard,

no signage.

And this is their main

manufacturing facility.

There's water everywhere,

all right?

This is a company

that's a paper company.

The company had just

claimed to have clocked in

$100 million U.S. in revenue,

which was up substantially

from the year before.

How was this growing

50 percent a year?

On the balance sheet,

they were showing about...

$5 million in raw materials.

And so they had

heaps and heaps

of this old corrugated

cardboard out front.

My friend climbed

one of those heaps

to take a look at the expanse

of rotting cardboard,

and when he came down,

he said,

"If this is worth $5 million,

the world's a much richer place

than I knew."

Carson and his dad looked

at each other at that point

ah, and said, "There's probably

something to do in this stock,

but it has nothing to do

with owning it."

This business

was a complete sham.

This is going to zero.

It's a total fraud.

I've never seen

anything like this.

Carson wrote a report

of his findings

and announced that he was

going to back his claims

by making a bet in the market

that the stock would collapse.

It would change

the course of his life,

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