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Xinyuan Real Estate Co., Ltd. Message Board

  • hmmm26 hmmm26 Sep 25, 2012 8:07 PM Flag

    Total Fraud, Little Fraud, Big Fraud: Tinker, Tailor, Soldier, Spy

    The last half of that title has nothing to do with this thread; I just thought it sounded cool.

    This thread's an attempt to clarify different types of fraud. It's not an argument, only a suggested framework. I invite all questions or comments, including suggestions for changes, additional categories, or better names.

    So far, I can think of three different categories of fraud: Total Fraud, Little Fraud, and Big Fraud. On the last two, I'm fighting my professional instinct to use terms like "material" or "significant."

    I. Total Fraud (But, Easy to Avoid).

    I think of Total Frauds as frauds so complete there's no real company anywhere in the whole mess. These are pure scams: Ponzi schemes, or when fraudsters issue fake earnings reports for bankrupt companies, or Scientology.

    Wait, scratch that last one. I don't wanna get sued.

    Luckily, Total Frauds are easy to avoid. Use the following two rules, and you'll never get done dirty by a Total Fraud:

    1. Buy Nasdaq or NYSE stocks only. No OTC Markets / Pink Sheet stocks. Below the Nasdaq/NYSE level, investors lose the protections of the SEC.

    2. Even among Nasdaq/NYSE stocks, No Reverse Merger China stock Listings (sometimes called "RTO"s, "RM"s, or Reverse Triangle Mergers). Companies that listed by reverse merger took advantage of a loophole in SEC listing rules to skip their IPO's.

    II. Little Fraud.

    In fraud, as in other areas of life, size matters. The market has learned to expect Little Fraud in Chinese companies and it prices them accordingly. On the other hand, Big Fraud still kills.

    I think of Little Fraud this way: as the "ordinary" fraud that exists in most Chinese companies; fraud -- and here's the important bit -- small enough that, if it were outed, the company's share price would still recover. Things like boasts and exaggerations in the way the company describes itself or its businesses, stacked deck type accounting to present a picture better than reality (without outright lying), stuff like that.

    To me as an investor, Little Fraud is OK. It probably exists in the companies I own, but it's unlikely to hurt me because the market's already assumed its existence and baked that fact into my companies' prices.

    III. Big Fraud.

    Big Fraud is Little Fraud on steroids. I think of Big Fraud as fraud so severe that its revelation causes an irreversible stock price crash. 99% of the time when I talk about "fraud" or "fraud risk," I'm talking about Big Fraud.

    Examples are unfortunately numerous, but the two I know best are Longtop and CCME.

    Big Fraud probably begins life as "normal" Little Fraud, but either the thief's greed gets too voracious (CMED's CEO started small, but eventually stole 60% of the company's ongoing revenues), or else Management decides to "slant" its numbers to avoid a disappointing earnings report, assuming things will get better, except sometimes they don't, so each quarter the "slant" gets bigger and bigger, to cover the increasing gap between reality and the picture in the ER's. Pretty soon, the thing gets out of control and -- presto, change-oh -- suddenly that tame Little Fraud becomes a company killing Big Fraud.

    I've grudgingly accepted Little Fraud as an unpleasant fact of life in China stock investing, but I still fear Big Fraud. What do other folks think?

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    • I don't know if they work on any cases on US listed ADRs. They won't give names of their clients. That's their privacy. I know most of their clients are small and middle size companies, in which some I am pretty sure are listed in China. I thing you have to remember ADRs like XIN still borrow money from Chinese banks even though they are listed in the US.

      • 2 Replies to growth.value
      • Hmmm, you got it. Most people in China, investors and management, do tolerate accounting "fraud" in a certain degree because this type of "fraud" is just so common. However, if someone created a bogus company to cheat investors' money. This action is not tolerated.

      • " I know most of their clients are small and middle size companies" so their not even A listed china stocks but smaller. Yet you compare them to a GAAP ADR listed China stocks.. now even you should know that in lemons to apples respectively.
        Sir please be honest this board is about XIN not third or fourth rate chinese companies that may or may not be listed in china . Are you sure they are not street corner rice stands your friends loan money too?

    • here are some frauds that were, worldcom enron, global crossing, and this list is very long and all American. So you should do some research.

      Are you stating XIN is a fraud?

      you seem to want to put that thought into peoples heads. maybe your a class action lawyer out of work, na lol, lots of work their.

      accounting irregularities

      as far as little frauds, always happens to American companies lets see earning issues, agressive accounting, off balance sheet transactions,, SPE's, holding companies, dummy companies, where their is a loop hole and profit, molality seem to take a back seat. so her are some lil or big accounting fraud or oversite TYCO XEROX QUEST KMART HALLIBURTON DUKE ENERGY they were just slanting the numbers as you say.

      So you only point to the china market . So what is your agenda here. lots of restatements in earning in american companies fraud and all that and im sure it was just an oversite of the MBA in charge could not remember where that went in the report so left it out or inflated it or..........

      • 1 Reply to harleyridingman2
      • @harley,

        1. It's absolutely true there's some fraud here (Enron, Worldcom, etc), but the tough truth is this: the RATE of fraud among US listed, China stocks is many, many times greater (probably hundreds of times greater) than the rate of fraud among US listed, US stocks. I've been in the markets a long time and I've never been within a mile of a US fraud, yet I've got clobbered twice by China stock frauds.

        I can't post a LINK to it anymore, but I'll try to bump forward an old thread with a LINK to an article where Professor Paul Gillis's Big 4 Chinese fraud numbers are cited. They're miserable; if I remember right, something like the teens percent of all the US listed China stocks handled by the Big 4 have turned out to be frauds.

        2. Having gone through the CCME civil war as a leader of one of the "CCME's not a fraud" factions, I can tell you with absolute certainty that nobody -- not even most of the company's employees, practically every English speaking one of which I got to know at CCME -- know for sure the company's a fraud until the whole thing blows up, so I don't know whether XIN's a fraud or not. All we can do is #$%$ XIN's RISK of fraud.

        3. Most people don't know it, but XIN's price is completely controlled by the perception of fraud risk. Increased earnings? Who cares? XIN just announced phenomenal, surprise earnings last quarter but since it made no changes on the fraud front, it crashed right back down to the $2.60's, where it was before. The only difference is that now its P/E is 1.3, whereas before it was 1.8. Macro econ changes? Laughable. See the earnings thing.

    • Sometimes Hmmmmmmmm you use a lot of words to say very little. Maybe it's the lawyer training. Little fraud is creative accounting which almost all companies do. Real fraud means the earnings are vastly different from what is stated.

      • 1 Reply to walrathcrai
      • I meant more than just what you'd find here. Here, when a company is allowed to choose between two accounting options, some might always choose the more advantageous, even if means there's some inconsistency in how they report some things (Method A in Jan, March, April, Aug, Sept, Dec; Method B all the other months). OK, that's cool.

        But that's significant enough to qualify as Little Fraud to me. Little Fraud's worse. Maybe as an example I'd call this LF: recording a payment on the last day of the quarter as having been made when it isn't actually expected until next week, so it can be included in the ER.

        95% of the time, that payment's actually going to be made next week and so as long as you don't double record it, the LF's tracks are covered up. No harm, no foul. The problem, of course, is that other 5%.

    • Nobody had any thoughts on fraud types?

      I was specifically rooting for a discussion of the Little Fraud question, whether western investors could or should learn to tolerate its existence (my own view), or whether it's a sin that makes all China stocks toxic (China bears' view, if I understand it correctly).

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