The China Hustle Page #8

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our markets than anywhere in the world.

But, at the same time,

we don't have a regulator

that looks over our, our filings

and says, "I want to protect

the public from this."

Our system... you know,

we file with the SEC,

and the SEC reads the disclosure,

and they comment

on, on the disclosure.

They don't determine whether it's viable

to be public or not.

They don't make that determination.

They let the free market

make the determination.

The SEC should do its job.

Your job is to look out

for investors,

but you've put the interests

of the Chamber of Commerce

and their big-business members

at the top of your priority list.

It is the SEC's job

to protect investors.

But it was chartered

in the 1930s,

at a time when stock prices

rolled off of ticker tape

and the markets closed at four.

Now, they're outgunned

and outmanned,

like Keystone Cops chasing

the starship "Enterprise."

Even if the SEC

gets its entire wish list

of documents from the company

and they have enough evidence

to pursue a case,

the Chinese people responsible

for this, don't really care.

When somebody breaks

the law here,

there is a process

where they're accountable.

At some point

in a China-based company,

that accountability ends.

And it ends at the ocean.

This is one of the first

things that Dan ever told me.

In China, it's not illegal to

steal from foreign investors.

I couldn't believe

the SEC would allow companies

to list on U.S. markets,

if it really had no way

to police them.

So I found an employee of the Chinese

state financial news agency,

who was willing to take a risk

to confirm the truth.

My name is Summer. I am a financial

journalist for the state regulators.

(in Mandarin)

If a company releases

false information about

its financial report

in the U.S. market,

Chinese domestic

regulatory authorities

have no power to punish it.

I will surely be punished by law

if I make counterfeit products

in China, theoretically speaking.

If I go abroad,

if I lie to foreign investors,

Chinese authorities can

do nothing to me.

Bottom line is,

the Chinese government

and the U.S. government,

on most levels,

don't work that well together.

You can't compel somebody

that has stolen millions

and millions of dollars

from U.S. investors

to come here from China.

You can't compel them

to testify.

You can't even find them.

Forget about

the average person

who thinks that their broker

or the SEC will protect them.

Even someone

like Crocker Coulson,

who worked inside the system,

couldn't find out

what was really going on

with these Chinese companies.

You're in

an alternate universe.

There's kind of this arms race

to do the simplest things.

You can't even look

at the bank statement.

You can't even go into

the local bank and ask them.

A lot of times,

the manager of the local bank,

will actually reprogram

the books of the bank

to make it look like the books

of his client are better than they are.

Anytime you have

a country like China,

where information

is not easily obtained,

any society like that

is a much greater risk.

In the United States,

we can go directly to a firm

and we can subpoena those records.

To get records out of China

is significantly more difficult,

if not impossible.

If you wanted to set out

to be a criminal,

probably the best place

to be a criminal

is someplace with no cops,

and that was China.

It was the Wild West.

I am delivered.

I'm at the airport.

Just headin' to the hotel.

Dan was like Nicolas Cage

in that movie

where he's the only one who knows that

the world is going to end.

He's screaming about it,

but nobody cares.

The auditors, the bankers,

Congress, the SEC...

None of them see

the financial tsunami

that Dan sees

coming from China.

So he decides to do

the one thing he can do,

take the criminals' money.

Their share count

has ballooned,

from a whopping 4.9 billion

shares four years ago

to 6.5 billion shares today.

It appears that the only way

that they can continue

to sustain

their business operation,

is through dilutive financing.

Normally, Dan publishes

his reports online.

But this time,

there's too much at stake,

a nearly $2 billion company,

Tech Pro.

He believes the company's chairman,

is misallocating shareholder money

to lavish on pet projects.

If he can convince the markets,

he'll wipe the company out.

It'll be his biggest short ever.

Now, I don't know

what that tells anybody else,

but, there's something going on here.

Our due diligence,

is a lot of black smoke,

lot of black smoke

coming out of this company.

That's a fire.

That needs to be looked into.

To change the world

I want to

Joining us on the floor

of the exchange right now,

Dan David. He's co-founder

of due-diligence firm,

GeoInvesting.

And I see here,

you also specialize in China?

We do.

My Sohn presentation in June

on Tech Pro,

Tech Pro's down 91 percent.

Is it vindication for you when

you see a stock

- like that plummet?

- Well, it was inevitable.

I... The stock was always going

to plummet.

Are you bullish

on China at all or is it just...

What is capitalism?

Is it an economic system?

Or is it an apparatus

that we can use

to make more money for ourselves and

take more money from others?

At its heart,

it rewards those who work hard,

but it also rewards those

who are willing

to take advantage of others.

When we describe

a fraud like this one,

we use terms like

"white-collar crime"

to distinguish it.

But really, it's just theft,

in its way, as violent

as being mugged in the street.

It can be traumatic to chart

the trail of personal loss.

How much was stolen

from each pension fund,

each retirement fund,

each of us.

The real story

is the aggregate value.

It's the investors who,

by the end,

were mostly retail investors.

These were mostly just people playing

the American stock market,

who looked at the financials

and believed them.

That money is money that belonged

to individual mom-and-pop investors

who thought, "Hey, I want to be

a part of the China growth story."

And they were also shares

that belonged

to mutual funds, like Vanguard,

that manage money for,

for example, The New York Times,

right?

The employees.

My pension fund money.

We sold ourselves

on a myth of China

as a really compelling market.

A nation that wanted

the leveling effects

of free trade.

You should

have known better.

Well, what I would pay,

if I have my money in Fidelity,

isn't that...

why do I pay these guys?

I don't know. I don't pay 'em.

I don't give 'em any

of my money.

It's like a game

of musical chairs,

when the music stops,

if you're left holding

the paper,

if you're left holding

the shares,

you are the victim.

Okay, um, my name is David Yee,

and I live in Atlanta, Georgia.

My name is Ray Snader.

I'm a print and broadcast

journalist

in Newport, Tennessee.

Tom Snodgrass

from, uh, Spring, Texas.

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