The China Hustle Page #6

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there was nothing happening

at this company.

All of a sudden,

things get turned on.

Lights start working.

The next day,

Rodman & Renshaw shows up

with a busload of investors.

Take a tour of the facility,

get back on the bus, leave.

All the lights go back off.

Rodman investors,

invest in a bunch.

You continue to find really

interesting anomalies in China.

I talked to the people who were

running the industrial gases

that were feeding a steel mill.

"We're making a profit

on this now,"

and then they said,

"Yes, but there's a problem.

It seems that

the gauges were wrong,

and we, uh, did not deliver

as much gas

as we charged

the steel mill for."

I said, "When did you find this out?"

They said, "Just last week."

I said, "And how much were

the gauges wrong?"

"Uh, by the exact amount

of our profit.

It's very strange."

If you respect me,

I will respect you.

If this return of respect

is about profit, I will give it up.

I've been told I am addressing

the Honorable Ho,

whose ancestors have been

the glory of their provinces.

I am humble Ho,

whose name stands in deep shadow

before the tincture

of the great company.

In China, business is done

following a tradition

of not having a particularly

strong legal system.

So people rely more on trust

and on personal relationships.

I shall gain merit in the eyes

of the company by being so trusted.

There's a lot of focus

on building those relationships

so that you can build the trust.

The Chinese call this network

of personal relationships, guanxi.

And so I give you small

gifts and I do you favors,

and then you owe me one.

You scratch my back,

I'll scratch yours.

If you do enough favors

of people,

you have the ability

to call on them

for a favor that might be

quite inconvenient for them.

And that they would feel

an obligation

to actually go forward.

This notion that guanxi

wasn't just trading favors

but represented something

more powerful is crucial.

Dan had told me that going

after Chinese companies,

could be dangerous.

But it wasn't until he told me

the story of Alfred Little that I really

understood what he meant.

When these short reports

started coming out,

there was a website

called Alfred Little.

And it started publishing these

very interesting reports,

the sort of the shoe leather,

like,

"We've gone out and we sat

in front of this factory,

and this is what we found."

The website described

Alfred Little

as an investor with

35 years of experience,

I think he was supposed

to have worked at Deloitte.

You know, maybe he lived

in Shanghai.

I mean, there was this whole

backstory, right?

He basically says that,

all these companies

in China are fraud,

are just wholesale bullshit.

And I was dismissive of it.

I can't remember the date,

but I got an email saying,

"I'm gonna be in New York.

Let's meet."

I was like, "Oh, okay,"

so I go to this hotel,

and there's this guy,

and he's like,

"Oh, I'm Jon Carnes."

Like, "I'm the guy who's been...

you know, I'm Alfred Little."

As one of the few Westerners

still working as a short seller

inside China,

Carnes knew how to be careful

and cover his tracks.

Posing as Alfred Little

had served him well.

But when he decided

to take on Silvercorp,

a mining company

in rural Hunan province,

he and his investigators would find

out the dark side of guanxi.

You know, some companies

are more aggressive than others,

but in general, I've found that

the more truthful the report,

the more difficult it is

for a company to explain

these negative truths,

the more likely they're going

to commit some form of retaliation.

Because if

a company can't answer

the questions raised

by the short seller,

then they look for other means

to stop the negative reports.

As Alfred Little began

to publicly question Silvercorp,

the company's stock price

started to drop.

Company officials called

in favors

with the local authorities.

Police began to threaten

Little's chief researcher,

Kun Huang,

detaining him for hours

or days at a time,

demanding to know whom

he was really working for.

Carnes knew that

there was no cavalry coming.

He'd asked the SEC for help,

and they said

their phones couldn't even dial China,

let alone protect him

and his team.

I'm looking for Officer Yi.

(speaking in Mandarin)

He sent another researcher

to secretly record evidence

that local police officials were doing

Silvercorp's bidding.

He would use the videos as leverage to

try and keep Kun out of jail.

Have you had any contact

with Kun Huang?

(in Mandarin)

Communist Party Official: No.

Official:
Don't have any

more contact with him.

Official:
Kun Huang is insignificant.

Like a pebble.

Official:
Toss one out and

no one would care.

Official:
He's a Chinese national

committing crimes in China.

This issue... If Silvercorp

didn't make such a big mess of it,

It all would have been concluded

by the end of last year.

Official:
Don't worry, we would not

prosecute an innocent person.

(man speaking Mandarin)

We started investigating Silvercorp

around May or June of 2011.

(in Mandarin)

We were informed by other investors

that Silvercorp operated

silver mines in China,

and that it was regarded very highly.

Kun had made secret videos

of Silvercorp's

under performing mines,

and some of the local officials

they had bribed.

He was detained briefly

twice in late 2011,

and officials promised

to leave him alone

if he would expose

and denounce Alfred Little.

He refused,

and later that year,

he was stopped at the border

as he tried to flee to Hong Kong.

When I first entered

the detention center

(in Mandarin)

nobody told me that I had

a right to talk to a lawyer.

I knew that the interrogators were

in cahoots with Silvercorp,

and they wanted revenge.

I arrived at midnight

and they put me in a cell.

It was only thirty square meters.

The room was filled with people

sleeping on the floor.

I was terrified. I didn't know

how long I would be locked up for.

I didn't do anything illegal.

But I ended up locked in a Chinese

prison for two years.

This was a great disaster for me.

It was devastating to my family.

But I think I did the right thing.

Good will ultimately

triumph over evil.

What...

how many shares short am I?

No sh*t.

Hmm.

Before Jon was exposed

as Alfred Little,

Dan thought he was a crackpot.

Hey...

Now, along

with Carson, Matt, and Soren,

they're part of

a loose-knit tribe.

Activist short sellers chasing

down frauds in China.

Most of them are realists,

believing the market finds

the truth on its own.

Dan is different.

He takes it personally.

Kun keeps going to

the psychologist once a week.

That was a great thing

you did, though...

Not cutting him loose.

Taking care of him

while he was over there.

How many of these other guys

we know would've just cut him loose.

We owe him a lot.

Kun's imprisonment changed Dan.

As far as he was concerned,

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