The China Hustle Page #4

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and unloading goods all day.

So even though

monitoring private companies

is illegal in China,

his team risked

lengthy jail terms

to set up surveillance cameras

outside the factory gates.

We filmed them for 344 days.

Tapes showed us

of very little activity going,

very few employees

coming in and out.

Dan figured that

if the company was doing

what it said it was,

it would have

hundreds of employees

and dozens of drivers.

So what we do is,

we have our investigator

pose as a tea salesman.

So he shows up,

and he's got a suitcase

full of tea samples,

says he's a tea salesman

and he wants to give

free tea samples for everybody.

And 40 regular staff

members in total, right?

(in Mandarin)

Yes, that's right.

40 regular staff members.

Then can you please

write down the number here?

Ok, I'll write down 40 people.

So tell me how many

employees you have here

so I can give you

enough samples.

We get that answer.

How many truck drivers? Only one?

(in Mandarin)

Yes.

What did it mean that

they only had one truck driver?

It meant that their volume

was vastly less

than they had claimed.

In the first half of this year,

Ah, Yongye grew both revenues

and net income by about 100 percent.

Calling out

China Green Agriculture meant

that Dan was also questioning

the integrity

of some of the guys he'd ridden

the China-stock wave up with.

guys like Crocker Coulson,

a stock promoter

who'd pushed this stock

and dozens like it.

What about, um,

China Green Agriculture?

So that's another

fertilizer story that we were...

Again, this kind of goes back

a fair ways for me.

- Yeah.

- I believe that was

an organic fertilizer.

It was also supposed to have...

um...

I really don't remember

a whole lot about that company.

What we came up with is,

they were doing 10 percent

of the business

that they claimed.

And then the fight began.

Puts out a press release

calling us terrorists,

saboteurs, criminals.

There was a statement from

five Beijing finance professors

who alleged

wealthy and sophisticated

short sellers from overseas

were robbing

small Chinese investors

and ignoring risks

of market instability.

They didn't cite any evidence.

Just to be clear,

we put a lot of effort

into trying

to weed out companies,

you know,

before representing them

and then to flag problems,

serious problems,

if we saw them.

There was no way to know

which were the good actors

and bad actors.

A gate guard

knows what's happening.

So we went

to the investment banks.

We took them our evidence.

We said, "Look what we found.

If you hire us and our team

to do diligence,

you'll have a better product

to sell to

the American people."

They said, "Get out of here.

You're telling us to pay you

not to collect 10 percent fees

on every transaction

done through this bank.

The less we know, the better,

and by the way,

if you tell anybody

what you found, we'll sue you.

Go back to Skippack."

So we went back to Skippack.

We published our research.

Dan's report laid out

his allegations

against China

Green Agriculture.

The stock trades

for a dollar today.

You know, it turns out

nobody believes them.

What happened

to the chairman?

Nothing.

I mean, he's kept the money.

And that's what this

is all about, right?

That's $113 million that has

just, poof, vanished

Ah, because they never really

did that kind of volume.

Dan realized he'd made

money off of companies' lies,

and it gnawed at him,

because he knew he'd crossed

into what a lot of people see

as the dark side of finance--

short selling.

What is short selling?

Hmm, let me think about this.

I want to-- this is always

a difficult one.

But short--

What is--

Well, the first short

economically

was probably some transaction

between, you know,

two Cro-Magnon person,

promising some guy--

some other Cro-Magnon

part of a sabre-tooth tiger.

This is Jim Chanos.

He's the dean of short sellers.

And he's brought down some of

the biggest frauds in history.

If you want to think

about short selling,

all kinds of commercial

transactions are short selling.

An airline that sells you

an advance-purchase ticket,

for example,

is shorting you a seat.

Short selling is betting

that a stock is gonna go down,

as opposed to go up.

So shorting a stock,

you'll often hear it referred to

as "borrowing shares."

This is where

a lot of people get confused.

Here's a simple way

to think of it.

Say I want to short sugar.

I think that sugar

is overvalued

and it's going to cost less

in, say, six months

than it does today.

I see a business opportunity.

I go to my neighbor

and borrow one pound of sugar.

Then I turn right around

and sell that sugar

for the going rate

of $1 a pound.

Yeah!

In about six months,

when I have to give my neighbor

a pound of sugar back,

I go buy it on the open market,

where the price has come down,

and it only costs me 50 cents.

I give my neighbor

a pound of sugar back,

plus a little extra

for interest,

and pocket

the 50-cent difference.

She's got her sugar back,

and I've made money on my bet.

You want everybody else

who's trading in that stock

to believe what you're saying

if you think that

the company is a fraud

or you think that something

about the company is not true.

The person that's most

attracted to short selling

is probably those who've been

dropped on their heads at birth.

They're iconoclasts.

Do I believe that their

motivation was to--

was justice for the world?

No, I think their motivation

was to profit from this.

It's about cleaning

our financial markets.

It's about stopping a fraud.

What I really want to do is,

I want to reach in...

Remember this guy,

Dick Fuld?

He ran Lehman Brothers,

the bank whose collapse

set off the financial crisis

in 2008.

He's got an opinion

about short sellers.

Rip out their heart,

and eat it before they die.

So there are

a lot of problems here.

There are a lot

of problems here.

When I bet against a company,

it's because I believe

that they're misrepresenting.

And their trend line

doesn't matter to me at all.

I am somebody that will

bet against fraud.

As Dan and Carson

began looking

for other Chinese companies

to short,

Matt was just getting back

from his safari.

He'd been out of the loop

and wanted to make sense

of what he'd been a part of.

So he asked his friend Soren,

a finance industry lawyer

from New York,

to meet him for a weekend

in the mountains

and take a look

at some of the documents

he'd saved

from his time at Roth.

In the process,

they would discover a new way

to look at the whole

landscape of fraud.

Matt said,

"Just look at these companies.

Tell me what you think."

L&L Energy was nominally

a coal company.

Very typical of an RTO fraud

in that

its financial performance

was simply too good to be true.

(man speaking Mandarin)

The notion

that a small reverse merger

from rural China could somehow

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