The Financial Investigator reached a Nasdaq spokesman, Robert Madden, on his cell phone for comment. After learning who was asking the questions and their nature, Madden suddenly developed an inability to hear the conversation and hung up, promising to call back. He never did.
It’s always fun when a flack reaches deep into his bag of tricks, and this is a reliable favourite. Or perhaps Madden has been taking pointers from Chris “Oooh, terribly bad line, terribly sorry” Huhne.
Regardless, the quote comes via Financial Investigator, and here’s why Nasdaq ducked him.
This morning, Li Tao, the chairman of a Nasdaq-listed Chinese company called Kingtone Wirelessinfo Solution Holding, rung the exchange’s opening bell.
For a bit of context, Herb Greenberg spotted the press release last Friday announcing the bell-ringing and wondered why Nasdaq had invited Tao, given that:
—Kingtone has a market cap of only around $24 million.
—Its stock trades for less than $2 dollars.
—It trades less than 60,000 shares a day.
But the really problematic issue, as both Financial Investigator and Greenberg explain, is Kingtone’s connection to another US-listed company.
Tao is also the founder and chairman of China Green Agriculture, which is under investigation by the SEC and is just one of many examples of Chinese reverse mergers gone bad. Kingtone was a subsidiary of China Green Agriculture before listing in May of 2010. China Green Agriculture started trading on the Nyse in October 2009.
The SEC’s inquiry, which started roughly a year ago, was revealed in January by J Capital Research, which blasted China Green in a 35-page report that recommended a short position.
Among the allegations in the report were that China Green had overstated revenues to US investors (by a factor of four relative to what it reported to the Chinese government), lied about its technology, and had failed to account for a mysterious $8m payment to an unnamed “state-owned enterprise”.
There are others in the report, which adds that the company has a class-action lawsuit against it pending for exaggerating its revenues. Probably the best part of the report is its description of J Capital’s visit to the company in 2009, a meeting that was cut short abruptly — but not before this observation: “We noticed that the company employees did not seem to know that CGA was a US-listed company.”
It’s difficult for a New York-based blogger to rigorously assess the accuracy of an investigation mostly conducted in China, but after our first read it does seem that J Capital has the goods. Financial Investigator also raised questions about China Agriculture last year.
And Kingtone, unsurprisingly, shows up early in the report and is similarly suspected of, erm, evasive reporting — plus no small amount of self-dealing (emphasis ours):
CGA Chairman Li Tao’s other listed company, Kingtone Wireless Info (KONE), makes scant information available to investors, but available documents detail significant financial dealings with CGA. KONE listed last May, shortly after CGA CFO Yang Ying became KONE CFO. Kingtone — which is purportedly a wireless technology company — sold a “drip fertilizer installation” to CGA before its IPO. In 2009, Kingtone reported that it derived $1.1 million in revenues from CGA. In 2010, Kingtone supplied a half million dollars in equipment to CGA for “smart” greenhouses in suburban Xi’an. CGA rents Xi’an premises from a Kingtone sister company.
KONE itself spent $12 million to buy “Kingtone Center” from an unnamed vendor in Xi’an in a 100% cash deal. But Kingtone reports that it has not been able to take possession: it says the seller has failed to pay taxes on the transaction. It is not clear where this $12 million has gone in the meantime. KONE also provides paid services to other of Mr. Li’s companies in the TechTeam group and rents space in Beijing from Mr. Li personally.
Gotta love the use of “purportedly”.
You get the picture. We know Nasdaq has been busy with other things, but it failed badly to do its homework on this one. Or for a less charitable interpretation of what happened, read to the end of today’s FI post. (We called Nasdaq for comment and couldn’t immediately reach a spokesperson. We left a message.)
The exchange, for instance, could have started by looking at Kingtone’s performance against the rest of the Nasdaq since it listed at $4 a share last May:
Yep, as of 11:30am Kingtone was trading at $1.74, down 56 per cent since it listed — Happy Anniversary! And today it celebrated by declining 7.45 per cent. CGA hasn’t done much better, and in the past year is down 46 per cent.
Anyways, this Kingtone press release from earlier this month says the bell-ringing was meant to celebrate the one-year anniversary of the company’s listing on the exchange last year, and adds:
The listing of our securities on the exchange in May 2010 represented a significant milestone for our company and our shareholders. We expect our listing on NASDAQ to improve our visibility and lead to increased liquidity and an expansion of our shareholder base as we continue to execute on our strategic objectives and build our business.
Yeah, well, it’s gonna be hard to expand your shareholder base if you can’t make your shareholders any money — or if they think you’re lying to them.
Related links:
The red color crime wave – The Reformed Broker
Beware a Chipo bubble – FT Alphaville