The China Hustle Page #5

---

efficiently mine and process coal

so much better than the best

coal companies in the world

was just not credible.

Digging into the papers,

they uncovered a new way

to understand

what was really going on

with the hundreds

of Chinese companies

listed on U.S. exchanges.

What we came back with were

what are called SAIC filings.

They're these filings

from the State Office of, uh...

Oh, my gosh, can't believe

I'm blanking on this.

State Office of, uh, Adminis--

State Administrative Office.

Is that right?

The interesting part

here was that

the filings in China

tended to be very accurate

or more accurate than

the fictions that were filed

with the Securities

and Exchange Commission.

In China,

a company might accurately say

they made $10 million,

while in the U.S.,

they could report

making $100 million or more.

These SAIC filings

were dead reliable.

They showed exactly

what was going on.

And this is-- this is

the cultural difference,

we can't find auditors

in China that will help us,

because let me

tell you something,

if we do find those people,

the government of China

will kill 'em.

I mean, they will take

their ass out

and shoot them

in the f***ing head.

This was, from the

beginning, a deception.

The purpose of it

was to deceive,

from day one, and we'd

never really seen that

at this scale

in the United States market.

And that's probably why

it took everyone by surprise.

That included Matt,

and his reaction was telling,

maybe it says something

about human nature,

about why we keep getting

into these messes.

He realized that hundreds

of millions of dollars

in Chinese reverse mergers

that he'd sold were frauds,

but he didn't react

with shame, just pragmatism.

He wanted to make sure he got

a piece of the ride down,

so he switched sides

and became a short seller,

like Dan.

I-- I did it

and made 78 percent in...

four days.

Eventually LLEN collapsed.

For short sellers

like Dan and Matt,

the filings were the final

piece of the puzzle--

not just evidence

from one company or another

but data from

all the companies.

For the first time,

they could see

the full scope

of the deception.

I don't know

what the numbers are,

but it's well into

the billions of dollars

that U.S. investors have lost.

$30 billion, I think

the number was $30 billion.

- $20 billion.

- $50 billion.

It's between

$20 billion and $50 billion

of market capitalization

of stock that's listed

here in the United States

that might be worth zero.

Individual mom-and-pop investors

and mutual funds were invested

in these Chinese companies,

so it really does affect

the average person

on the street as well.

If this one company

is so brazenly fraudulent,

what does that say

about the rest of the market?

Over 300 reverse mergers

with businesses operating

in China.

This whole thing

could be fraudulent.

And that money

could never be recovered,

and if you got caught,

there was no consequences.

When you talk about

the investment banks,

especially the bigger ones,

fraud is baked

into the income statement.

How many investment banks

have had to pay fines this year

for fraud?

Wells Fargo? Check.

Bank of America has in the past.

Check.

Morgan Stanley has in the past.

Check.

Nobody's going to jail.

It's a fine.

So it becomes part--

it becomes part

of what you budget.

You budget for fraud.

Maybe Dan's fixation

on fraud comes from the fact

that Flint, Michigan,

where he grew up,

is the victim

of a kind of fraud.

Big companies made big promises

to the people who lived there,

and in the end,

they couldn't keep them.

Dan saw firsthand how lies

coming from corporate offices

actually affect

real people on the ground.

Where other finance guys

see market machinations,

Dan sees his hometown,

busted, full of ghosts.

This was a pretty nice area

30 years ago.

Hmm.

This was a school.

By today's standards,

it was pretty violent.

I mean, I can't even imagine

10, 11, and 12-year-old kids

swinging bats

at each other today.

No, I was definitely--

I was happy growing up here,

for sure.

Companies lie.

Companies lie.

Companies have companies'

best interests at heart--

not a community's,

not a people's.

The people need to have

their own interests at heart.

Flint's an awesome town.

It's always been

an awesome town.

Very hardworking community.

Very hardworking community.

All right, look.

I saw myself growing up in Flint

and staying there forever.

And then the jobs were gone.

Dan had investigated

the companies

from the ground up.

Matt had seen

the bird's-eye view

of their SEC filings.

Together they began to realize

how shockingly simple

the whole thing was.

Let's say that you wanted

to construct a fraud.

What you would do is,

you would have a factory.

You would have a chairman.

And then you would find

someone,

a gatekeeper, for example.

A finder says,

"This is your business.

What could you do

with $100 million?"

He would help with

connections with auditors,

legal tier-three banks.

This operator in China

would be like,

"Well, that'd be--

it would be a game changer."

"I'd buy up my competition.

I could do this.

I could do that.

I'd be this big."

Get to the United States.

This guy or this company

in China

would say, "Okay, I'm gonna get you

a $100 million,

but this is what you have to do.

You have to tell people

that you're already this big."

You just had to make sure

that you checked all the boxes

in order to get it to be sold.

And don't worry,

because if they even find out

that we're lying,

you won't go to jail.

- You're in China."

- All you needed was

the collusion

of a couple players,

and you could defraud

anyone you wanted.

And if we're lucky enough

to get the money

and they find out you're lying,

you get to keep the money.

So there's really no risk here.

I'll do all the work.

All you have to do

is continue to tell the lie.

You know,

if you're gonna be a CEO

of a public company,

you've got to be educated,

gone to college, got an MBA.

These guys had zero of that.

Zero, a lot of these guys.

They came from second,

third-tier cities in China.

They came from a different way

of doing business...

Like running

their own candy store

type of way doing business.

A Chinese chicken farmer

does not wake up one day

and understand how to defraud

the U.S. capital markets.

From the creation

of these little companies,

it's all about

stock market fraud.

Once Dan, Matt,

and the other shorts

figured out the basic characteristics

of the China frauds, they started

taking them out, one by one.

Puda Coal, the chairman,

stole investors' shares.

SINO Clean Energy,

super technology.

This company puts advertisements

on buses.

They would crush coal,

mix it with water,

and that was energy...

phenomenal.

They hired none other

than Loeb & Loeb to sue us.

China Integrated Energy,

for weeks and weeks and weeks,

Rate this script:5.0 / 1 vote