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Orient Paper: Not all BDOs are the Same

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In this article, I’m going to discuss why BDO Limited, the Hong Kong branch of the BDO International network of auditors, should not be considered a top tier auditor, and is not comparable with the separate U.S.-based BDO Seidman. Not all BDO member firms are the same.

A glaring red flag among some Chinese RTO (“reverse takeover”) smallcaps is their poor choices for auditors – many firms have hired unheard-of firms to act as their public auditor. In my articles on China Marine Food, I have questioned the quality of the company’s audit firm, ZYCPA, and wondered why a $70mn revenue business would hire an auditor that has only 2 partners and 25 personnel; audits no other exchange-listed public U.S. company; and has its main partner being sued for aiding a HKD$125m fraud of a European investor.

Some RTO Chinese companies have tried to avoid controversy by hiring BDO Limited as their auditor. Investors see “BDO” in the audit firm’s name, and assume that all BDO’s abide by the same strict audit standards as BDO Seidman, the U.S.-based and most well-known BDO member firm. That’s not true.

I’m going to provide several data points that provide evidence that investors should be cautious around companies audited by BDO Limited:

1. BDO Mccabe Lo, the predecessor to BDO Limited, was the auditor of China Expert Technology, an infamous Chinese fraud that blew up in 2007

2. BDO Limited is not inspected by the PCAOB

3. The SAIC and SEC financial statements match for a BDO Seidman-audited firm, Tongxin International, but do not match for two BDO Limited-audited firms, Orient Paper and China-Biotics, Inc.

The BDO International Network

BDO International is a sprawling international network of audit firms that has more than 1,000 offices in more than 100 countries. Like many international auditors, the firm is comprised of individual member firms. The main member firm in the United States is BDO Seidman LLP. The main member firm in Hong Kong is BDO Limited. While both carry the BDO affiliation, they are completely separate audit firms.

BDO Limited was the auditor of China Expert Technology

One of the most illustrious frauds in the U.S.-listed Chinese RTO smallcap space is China Expert Technology (CXTI). CXTI claimed to provide information technology network and infrastructure consulting services to government and corporations. It had stunning financials – from 2003 to 2006, its revenue allegedly grew from $6m to $66m, and its net income grew from $1m to $8m, with smooth revenue and earnings growth in each year.

Then one day, it stopped filings it financial statements. Its CFO quit and its CEO disappeared. Its stock dropped from $7 to 50 cents in two months. The company vanished. The widespread consensus is that the company was a hoax, and that the financial statements were fabricated. Its story has been documented in several places, such as here:

China Expert Technology’s auditor was none other than BDO Limited. Technically, it was BDO McCabe Lo Limited at the time, but the two firms are the same – BDO McCabe Lo Limited changed its name to BDO Limited when it merged with Shu Lun Pan Horwath Hong Kong CPA Limited in May 2009.

The implication for investors currently invested in companies audited by BDO Limited is troubling. If BDO Limited could not detect fraud at a company that appeared to be entirely fabricated, can we rely on it to detect fraud at Orient Paper, a company that at least has some production lines and some semblance of operations? I believe that Orient Paper is falsifying its financial statements, and that the actual underlying company is materially smaller than its SEC financial statements indicate. In contrast, CXTI appeared to be entirely a hoax – essentially, it appears to have been 100% fraudulent whereas ONP may only be 80% fraudulent.

BDO Limited is not inspected by the PCAOB

The PCAOB is the accounting firm’s quasi self regulatory organization – it is comprised of accountants from different PCAOB member firms that do annual inspection audits on other PCAOB member firms. It’s referred to as “the auditor of the auditors” because it double-checks selected audits and provides reports on its findings.

BDO Seidman allows the PCAOB to inspect its books, and its 2009 inspection report is included here.

BDO Limited does not allow the PCAOB to inspect its books, because it is Hong Kong-based whereas the PCAOB is U.S.-based.

Granted, just because BDO Limited is not audited by the PCAOB doesn’t mean that its audit standards are subpar. But when comparing BDO Seidman and BDO Limited, I would be more comfortable with BDO Seidman-audited financial statements because the firm is inspected annually by the PCAOB.

Comparison of SAIC and SEC financial statements for companies audited by BDO Limited vs BDO Seidman

Over the past few months, I and other investors have compared Chinese companies’ SEC filings with the local financial statements that the companies’ main operating subsidiaries must file with the Chinese government. My articles/posts are here, here, here and here. “Waldomushman” has compared CSKI’s and SOLF’s SEC and SAIC financial statements on his website at has done the same for ONP, though it has not yet released its copies of the SAIC financial statements.

In total, comparisons of SEC and SAIC filings have been posted for CSKI, CMFO, LIWA, ONP, YUII, FUQI, and SOLF. For CSKI, CMFO, LIWA and ONP, the numbers don’t match and there is additional evidence that the companies are falsifying their SEC financial statements. For YUII, FUQI and SOLF, the numbers do match (or, more accurately, are in the same ballpark).

In the following, I compare SEC and SAIC financial statements for a BDO Seidman-audited company, Tongxin International, and show how the SEC and SAIC financials match. Then I compare the SEC and SAIC financial statements for a BDO Limited-audited firm, China-Biotics Inc., and show how they don’t match. As Muddy Waters has explained, the ONP numbers don’t match either (ONP disputes whether Muddy Waters has the correct subsidiary, but I believe that Muddy Waters has the correct subsidiary based on their July 2 2010 response to ONP).

First, let’s look at BDO Seidman-audited Tongxin International (TXIC). TXIC is a Chinese auto parts company that was purchased by a SPAC in 2008. Its SAIC financial statements are here:

Click here for TXIC’s SAIC Financial Statements in Chinese

Click here for TXIC’s SAIC Financial Statements in English

Here is a comparison of the SAIC and SEC financial statements for TXIC:

As we can see, the numbers match, for the most part.

Next, let’s look at BDO Limited-audited China-Biotics, Inc. (CHBT)

Click here for CHBT’s SAIC Financial Statements in Chinese

Click here for CHBT’s SAIC Financial Statements in English

Also, here is CHBT’s full 2008 SAIC annual inspection report in Chinese.

Here is a comparison of the SAIC and SEC financial statements for CHBT:

CHBT’s numbers do not match – the SAIC financial statements show a far smaller business than the SEC financials indicate.

In terms of Orient Paper, as Muddywaters has discussed, ONP’s historical SEC and SAIC financials also do not match.

Therefore, our BDO Seidman-audited company has matching financial statements, whereas two BDO Limited-audited companies do not have matching financial statements. This provides evidence for our thesis that investors should remain cautious around firms audited by BDO Limited. BDO Limited is a different firm than BDO Seidman and there is evidence that BDO Limited does not subscribe to the same audit standards as BDO Seidman. Given its history with China Expert Technology, it has demonstrated that it has not been able to prevent frauds in the past. Given that ONP and CHBT do not have matching SEC and SAIC financial statements, and that there are numerous other signs that ONP is falsifying its SEC financial statements, there is evidence that BDO Limited is also not preventing frauds in the present.

Disclosure: short CMFO, ONP and long TXIC


Written by chinesecompanyanalyst

July 12, 2010 at 1:01 am

Posted in Orient Paper

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Orient Paper: Another Fraud

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I have spent much of the past month describing why I believe that China Marine Food Group (CMFO) is falsifying its financial statements. My posts and articles are here, here and here. From my posts, it should be clear that I don’t think CMFO is the only U.S.-listed RTO Chinese company that’s making up its numbers.

Another one is Orient Paper. Over the next few weeks I will explain why I believe this is the case.

Today, I will focus on a research report published by Carson Block and Sean Regan at “Muddy Waters LLC” earlier this week.

You can access it here.

This post will summarize several of Muddy Waters’ allegations. I urge readers to read their entire report, as my brief post does not do it justice.

1. Like CMFO, ONP is using an acquisition to justify a large equity raise that it is likely using for dubious purposes, such as redirecting the funds to personal bank accounts.

On April 12, ONP announced that it had entered into an equipment purchase agreement with Henan Qinyang First Paper Machine Limited to purchase a corrugating medium paper production line with an annual production capacity of 360,000 tons for $27.8m.To fund the acquisition, ONP raised $27m in a secondary equity raise underwritten by Roth Capital Partners.

Muddy Waters wrote this:

“We spoke with the purported seller of the equipment, Qinyang, and four other Chinese papermaking equipment manufacturers. Qinyang told us that its highest capacity 5.6 m corrugating medium production line (the type ONP purports to have purchased) produces only 150,000 tons per year and costs approximately $4.4 million. This stands in stark contrast to ONP’s contention that it is purchasing a single line from Qinyang that will produce 360,000 tons per year for a total price of $27.8 million.”

Qinyang further stated that no Chinese manufacturer makes a 5.6m corrugating medium line that can exceed 200,000 tons per year. Furthermore, the most expensive line was no more than $7.3m. Muddy Waters provides a table showing the companies contacted, their URLs and the rough prices of their highest capacity 5.6m corrugating medium production lines.

No company quoted a price greater than $7.3m.

In my opinion, ONP is either misappropriating 60% of the capital raise and using the remainder to purchase a line, or misappropriating all of the $27m capital raise and purchasing no line.

2. ONP also made a $5m capital raise in October 2009, allegedly to purchase digital photo coating lines owned by He bei Shuang Xing Paper Co. Ltd. But according to Shuang Xing’s audited financial statements with the Chinese government, its fixed assets were worth less than $500k.

With CMFO, we saw a similar instance where the company purchased a company for an amount far more than the target could reasonably be worth. With the case of Shuang Xing, ONP appears to be using the asset purchases as justification to raise equity, which was then likely diverted to personal bank accounts, in my opinion.

3. ONP’s SAIC financial statements show revenue, profit and assets that are far lower than their SEC financial statements, according to Muddy Waters.

In due time, I’ll publish a post independently discussing and providing ONP’s SAIC filings. But I want to mention here that based on Muddy Waters’ research, the SAIC and SEC financial statements don’t match.

The company has claimed that Muddy Waters had acquired the AIC documents for the wrong company. Muddy Waters have refuted that, and has provided evidence demonstrating their case. We’ll discuss this more in future articles.

4. Muddy Waters provide visual evidence comparing ONP’s plants / technology with competitors’ plants.

Here is a video provided by’s Rick Pearson on ONP’s facilities.

In contrast, here are pictures of two competitors’ plants.

Shandong Chenming Paper Holdings Ltd.:

Nine Dragons Paper Holdings Ltd.:

The differences between the Orient Paper plant and the competitors’ facilities are striking. The Orient Paper facilities are old, shoddy and in poor condition, whereas competitors’ machines appear far more professional and new.

There is numerous additional evidence in the Muddy Waters research report that illustrates how Orient Paper is falsifying its financial statements and inflating its assets and operating metrics in its SEC financial statements. In future posts or articles, I will elaborate on some of the financial metrics. I will also explain how the Company’s auditor, BDO Limited, is not the same as BDO Seidman, and how certain Chinese companies have been using auditors within the BDO family to trick investors into mistaking them with the more reputable U.S.-based BDO Seidman.

Disclosure: short CMFO and ONP

Written by chinesecompanyanalyst

July 2, 2010 at 11:41 am

CMFO June 23 Conference Call: A Response

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This morning, China Marine Food had a conference call to address concerns raised by myself and Chimin Sang in previous articles.

In my opinion, it was a fairly uneventful call and the company did not address the specific concerns that we have raised about the Xianghe Acquisition. Most of the discussion focused on current performance metrics and forward-looking projections regarding Xianghe.

My concern, on the other hand, relate to whether the 2009 Xianghe financial statements are falsified. I question how Xianghe could generate $7.6mn of revenue, $1.7mn of net income and $1.2mn of operating cash flow in its first 5 months of operations with (i) $44k of startup capital it received from its original founder, (ii) four hundred and fourteen dollars of capex, (iii) minimal spending on advertising, marketing and other expenses related to building a popular beverage brand, (iv) with 900x inventory turns, etc. As a reminder, the original founder of Xianghe purchased “know-how” for the algae drink for less than ten thousand dollars in January 2009. He then sold his company, which he began in July 2009 with less than fifty thousand dollars of registered capital, for $28mn to CMFO in November 2009.

My blog post and Chimin Sang’s article go into greater detail on why we are skeptical about the accuracy of  Xianghe’s financial statements. Few of our concerns were addressed on th call. Rather, the company and analysts from Global Hunter, Rodman & Renshaw, Hudson Securities and Brean Murray asked about distribution channels, revenue projections, June trends, etc. The core concerns of skeptics such as myself were not addressed.

The company did mention that it was going to upgrade auditors. Certain callers in the Q&A portion of the call asked whether the new audit firm was going to be a top-5 firm or a top-20 firm, and re-iterated their desire to see a top-5 firm being appointed.

The sad truth is that even a top-5 auditor doesn’t prevent fraud in Chinese companies – those experienced with fraudulent chinese companies that went public in Singapore or Shanghai will attest to that. But I’d also agree that if the company would like to genuinely address some of the concerns I and other investors have, it would upgrade to one of the following 5 auditors:

2. PWC
3. Ernst & Young
4. Deloitte & Touche
5. Grant Thornton

I will provide a link to a transcript of the call when it becomes available.

Disclosure: short CMFO

Written by chinesecompanyanalyst

June 23, 2010 at 10:54 am

Posted in Chinese RTOs

CMFO’s Auditor’s Role in Another Alleged Fraud

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ZYCPA’s Involvement in an Alleged Fraud

Please see disclosures at the bottom of this article.

Throughout my past few posts on China Marine Food Group, I have implied that the small size and unknown reputation of CMFO’s auditor, ZYCPA Company Ltd., should give investors pause.

This article takes a far more concerned stance. According to a lawsuit filed in Hong Kong last year, ZYCPA (or, more accurately, its predecessor firm) and its majority shareholder were active participants in a series of frauds committed against a foreign investor. According to the allegations, ZYCPA and the shareholder, Johnny Tang, were not mere bystanders in the fraud. Rather, Tang was allegedly an active co-conspirator who helped a Chinese businessman steal HK$108mm from the foreign investor.

My prior post on CMFO’s Xianghe acquisition provides compelling evidence that China Marine Food is defrauding investors. Specifically, I believe that the company is much smaller than its SEC filings indicate. Previously, I simply thought that the company was able to falsify its financial statements because it was receiving negligible oversight from its auditors. But if the lawsuit’s allegations are true, the actual circumstances may be far more sinister.

Primary Documents

There are several primary documents worth reading.

First, here is the Statement of Claim for the lawsuit.

Second, here is a link to a 9-page report written by Target Newspapers, a Hong Kong business periodical, discussing the lawsuit.

Third, here is a lawsuit for defamation filed by Tang against the foreign investor.

The Lawsuit

Issued on March 23, 2009, the original lawsuit is between Christian Emil Toggenburger, and two holding companies he owns, against (i) Hung Viet Derrick Luu, (ii) Zhong Yi (Hong Kong) C.P.A. Company Ltd and (iii) Ka Siu Johnny Tang (the majority shareholder of Zhong Yi).

Zhong Yi (Hong Kong) C.P.A. Company Ltd is the predecessor to ZYCPA Company Ltd, CMFO’s auditor. Zhong Yi changed its name to ZYCPA as a result of potential bad press coming out of this lawsuit.

I will first show a graphic timeline outlining the order of events that transpired during the alleged fraud.

The cast of characters are as follows:

Christian Emil Toggenberger is the foreign investor who was allegedly defrauded and was cheated out of HK$108mm.

Hung Viet Derrick Luu is the Chinese “businessman” who allegedly defrauded Toggenburger and to whom the HK$108mm was transferred.

Ka Siu Johnny Tang is the majority shareholder of ZYCPA Co. Ltd. (successor to “Zhong Yi (Hong Kong) CPA Company Ltd.”), and actively helped Luu execute the fraud, according to the allegations. ZYCPA is CMFO’s current auditor.

Here is the timeline:

The Allegations

I will first discuss a summary of the fraud allegations. Then I will focus on the active role that the majority shareholder of ZYCPA played in the fraud, according to the allegations.

The events that follow are based on the allegations in the lawsuits I provided above, primarily from Toggenburger’s original lawsuit. Tang has countersued Toggenburger for defamation. The litigation is ongoing. The following allegations have not yet been proven in a court of law, and I am merely summarizing the sequence of events as alleged in the lawsuit.

Warderly Fraud Allegation

The events began when Tang introduced Toggenburger to Luu in November 2006. Tang represented Luu to be a billionaire entrepreneur who was well-connected in China and Hong Kong.

Shortly after the initial introduction, Luu and Tang met Toggenburger in January 2007 to pitch a HK$25mm loan to Warderly International Holdings Ltd, a publicly traded company on the Hong Kong Stock Exchange. Over the course of two meetings, Luu proposed that Toggenburger make a convertible loan for HK$25mm. The loan would be convertible to 20%-25% of Warderly’s equity, or pay 2% per month for 2 years until maturity. Warderly would use the loan to acquire an oil re-processing plant in Beijing from a business partner of Luu.

Toggenburger agreed to make the investment.

In March and April 2007, Toggenburger lent HK$23mm to an intermediary escrow agent. HKD$5mm was transferred to a subsidiary of Warderly, while HK$18mm was transferred to a separate unrelated investment project of Luu’s. Luu promised Toggenburger that the HK$18mm transfer was temporary and would soon be repaid, with the funds being redirected to Warderly.

Toggenburger never received any bonds or shares of Warderly. Luu received shares in Warderly for the contribution of HK$5mm to the Warderly subsidiary, and kept the shares for himself. The remainder of Toggenburger’s investment stayed locked up in Luu’s separate investment project.

Here is a graphical representation of the flow of funds:

As we can see from the graph, HK$23mm left Toggenburger and was essentially redirected to Luu.

In April/May 2007, Tang called Toggenburger to say that Warderly “was in trouble” and the Warderly agreement “was not working out”. Simultaneously, Luu was “in trouble” and could not repay the money transferred to his investment project.

In May, shares in Warderly were suspended and in January 2008, the Warderly subsidiary in which Luu had received shares was wound up.

Toggenburger had lost HK$23mm.

Car Racing Fraud

Our story doesn’t end there.

When Toggenberger found out that his HK$23m investment was lost, he was naturally not pleased. Tang, however, told him not to worry and that Luu would make it up to Toggenburger by offering another attractive investment opportunity. Luu had an equity stake in a racing car project in mainland China, and would offer part of that stake to Toggenburger at a reduced valuation.

Specifically, in a May meeting also attended by Tang, Luu offered to sell to Toggenburger a 15% share in a car racing project in mainland China. The 15% stake was valued at ~HK$40mm, according to Luu, but he offered to sell the 15% stake at a discounted price of HK$16mm to make up for the failed Warderly investment. Luu told Toggenburger that the car racing project was so profitable that investors would earn a return of 100% on their investment every 6 months. He also said that broadcasting minutes for commercials to be shown during car races had already been sold and such cash flow alone was enough for Toggenburger to get repaid his initial investment within two months.

Tang also claimed that he had seen and checked the documentation for the project (ie. contracts with Champ Car World Series LLC, the leading US car racing association); that the project was a good investment for Toggenburger; and that it was the only way for Toggenburger to recoup his losses from Warderly.

Toggenburger agreed.

On May 21, 2007, Toggenburger paid HK$16mm to Zhong Yi as escrow agent, with the escrow agreement stipulating that the funds would be released to Luu only if the transfer of certain racing contracts were transferred to the holding company that Toggenburger was investing in.

The HK$16mm was released to Luu without this stipulation being met.

No car races have been held pursuant to the car racing project. No revenue has been earned from the car racing project. Toggenburger received no return on his investment.

Toggenburger lost HK$16mm.

Listed Company Fraud

It still doesn’t end there.

On the last week of May, Luu and Tang introduced a further investment to Toggenburger. They told Toggenburger that they could assist him to acquire a listed company (ie. a “shell” company), and that the car racing project or any of Luu’s other projects could then be injected into that shell. Luu and Toggenberger would ultimately become shareholders of the listed company.

Toggenburger agreed.

Between June and July 2007, Toggenburger wired HK$73mm to Zhong Yi CPA Company, Ltd, which again acted as the escrow agent. In July 2007, Luu and Tang introduced Toggenburger to a firm that introduced Toggenburger to the owners of a publicly listed shell company in Hong Kong. In October, Toggenburger signed a contract with the shell’s shareholders to purchase a majority of the shares of the shell.

In December, Toggenburger told Tang and Zhong Yi to transfer the escrowed funds to the shell’s shareholders. Tang told Toggenburger that there is “some problem”, and the transfer could not be carried out. Toggenburger was not able to complete the transaction with the shell’s shareholders.

In February 2008, Tang told Toggenburger that the HK$73mm “was being used in another account” belonging to Luu. It was “still locked” in Luu’s “other investments”.

Zhong Yi, acting as escrow agent, had transferred the funds to Luu and/or used them to the benefit of Luu, without the knowledge of Toggenburger.

Toggenburger had lost HK$73mm.

As collateral for the HK$73mm, Toggenburger had been given 1mm shares of China Oil and Methanol Group Inc., a company incorporated in Nevada. On June 23rd, 2007, Luu took Toggenburger on a day trip by car to Guangdong province and showed him 3 refineries, which Luu said were assets belonging to 3 of China Oil’s operating subsidiaries.

Ultimately, it surfaced that China Oil has no operating subsidiaries, does not own any industrial complexes and is not earning any revenue.

In total, Toggenburger was cheated out of HK$108m, according to the lawsuit:

Tang’s and Zhong Yi’s Roles in the Fraud

As can be seen from the above events, Tang allegedly played an active role in the frauds. He was present in many of the meetings between Luu and Toggenburger. He also allegedly made a variety of untrue claims that were fraudulent in nature.

In two instances, his majority-owned firm, Zhong Yi CPA, acted as escrow agent between Toggenburger and Luu. In both instances, Zhong Yi violated the terms of its escrow agreements and transferred funds to the benefit of Luu and to the detriment of Toggenburger.

In the car racing project, Zhong Yi CPA was contractually obligated to hold in escrow Toggenburger’s funds until certain racing contracts were transferred from Luu’s entity into another legal entity that Toggenburger was indirectly investing in, and certain other conditions pursuant to “closing” were met. Zhong Yi transferred the funds to Luu’s benefit without these conditions being met.

In the listed company fraud, Toggenburger transferred HK$73m to Zhong Yi for the purpose of investing in a listed shell company. Zhong Yi instead transferred the funds for the benefit of Luu. When Toggenburger asked for the funds to be transmitted to the owners of the shell company, Tang told him that there was “some problem” and that the funds were locked in Luu’s investments.

Tang also represented that he had viewed the car racing contracts with Champ Car, as well as the land title agreements to land near the car racing project to which Luu planned to develop properties, and to which Toggenburger was to receive interests. Instead, the Champ Car contracts were materially misrepresented to Toggenburger, and the land titles didn’t exist.

Tang was present in many of the meetings between Toggenburger and Luu, and recommended Toggenburger to invest funds with Luu. He was also responsible for originally introducing Toggenburger to Luu.


The same man who owns a majority stake in ZYCPA is alleged to have actively aided the defrauding of a foreign investor out of HK$108m. Johnny Tang is one of two partners at ZYCPA and its majority owner.

Investors should not be merely concerned that CMFO is receiving inadequate oversight from its auditor. They should be concerned about whether ZYCPA is actively aiding China Marine Food management in falsifying its SEC financial statements. As discussed in previous posts, the business claims made by Xianghe are simply not possible. The Xianghe financial statements are very likely falsified.

These same financial statements are audited by ZYCPA.


At the time of writing, I and affiliated entities have a short position in CMFO.

In no part of this post do I attempt to provide false or misleading information. The discussion of events in this post are primarily based on allegations in a lawsuit from March 2009, which I’ve included in the post. This lawsuit is ongoing and none of the allegations have been proven in a court of law.

Written by chinesecompanyanalyst

June 15, 2010 at 10:20 am

Posted in Chinese RTOs

CMFO: 2009 SAIC financials

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Today, CMFO announced that its 2009 SAIC financial statements match its 2009 SEC financial statements. I also posted a comment to that effect on Tuesday on my Seeking Alpha post on the historical SAIC financials. I’m going to re-paste that comment below:


I’ve received the 2009 SAIC financial statements and have had them translated.

The Chinese version is attached here.
The English version is attached here.

The 2009 SAIC statements match the company’s 2009 SEC financial statements.

This by no means leads me to believe that CMFO has been accurately representing itself in its SEC filings. Rather, the chief financial officer of CMFO has indicated that he was alerted several months ago to the fact that the historical SEC and SAIC financial statements did not match. An investor on (login required) has also identified himself as having asked the CFO about this discrepancy several months ago. I believe that as a precaution to future allegations of fraud, such as mine, China Marine Food made sure that the 2009 SAIC filings matched their 2009 SEC filings.

I believe that I have overestimated the veracity of SAIC filings in my previous article. Now I think that they can be falsified just as SEC filings can.

The chief financial officer of CMFO naturally has a different story, and I will let him argue his case on his own. Investors can then decide whether my story or his story is the more compelling one.

The mismatch between the 2006, 2007 and 2008 SEC and SAIC financial statements was one element of my case that China Marine Food is much smaller than its SEC filings indicate. The Company’s dubious acquisition of Xianghe plays a more central role in my argument.

I will end with a final point. In this link, I have included comparisons of SEC and SAIC financial statements for four companies: FUQI, YUII, SOLF and CMFO.

I provide backup for FUQI’s and YUII’s SAIC financial statements on my blog at here and here, and SOLF’s SAIC financial statements are available at

For FUQI, YUII and SOLF, the SAIC and SEC financial statements are in the same ballpark. But you’ll notice that the numbers are not identical; rather, Chinese GAAP and other reporting norms will always result in differences between SEC and SAIC filings. For SOLF, for instance, 2008 SAIC revenue was $809mm while 2008 SEC revenue was $712mm. Similar differences exist in other line items as well. But in CMFO’s 2009 filings, the revenue, gross profit, net income, total assets and total equity are nearly identical, different only by a couple million dollars at most. YUII’s are fairly close as well, but there are still more discrepancies than CMFO’s filings.

While it’s ironic, my evidence for fraud when looking at the 2009 SAIC financial statements is that they match the SEC filings too closely.

Disclosure: I hold a short position in CMFO.

Written by chinesecompanyanalyst

June 10, 2010 at 1:07 pm

Posted in Chinese RTOs

CMFO and Xianghe: A Dubious Acquisition

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This article discusses a questionable acquisition that China Marine Food made in January 2010 that was used to justify a $30mm equity capital raise.

As I wrote in my last post, the financial statements that CMFO files with the SEC are substantially different from the audited financial statements that it files with the Chinese government. Whereas companies like YUII, FUQI and SOLF have matching financials when comparing US and Chinese audited financial statements, CMFO’s revenue in its Chinese filings for 2008 were 85% lower than in its SEC filings. Other financial line items were smaller by similar orders of magnitude.

The company is falsifying one set of financial statements – that’s an obvious fact. The question facing investors is whether CMFO is falsifying the SAIC financials that they file to seven branches of their own government, or whether they’re falsifying the SEC financials that they used to raise $30mm of cash from U.S. investors in January 2010.

In this article, I explain why an acquisition that the company made in January 2010 provides strong evidence that CMFO is engaged in fraudulent activities. Specifically, the company which CMFO acquired is clearly fraudulent itself.

A Questionable Acquisition

In January, CMFO raised equity capital partly to fund an acquisition of Shishi Xianghe Food Science and Technology Co., Ltd. (“Xianghe”). Xianghe is a manufacturer of algae-based soft drinks. The purchase price was $27.8mm.

Here is the description of Xianghe’s product:

“Xianghe is a Fujian based manufacturer of the branded Hi-Power algae-based soft drinks. Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese Academy of Fishery Sciences in coordination with the founder, Qiu Shang Jing. Hi-Power is marketed as a high-protein content drink, low in calories and fat, which provides the consumers a combination of immune system benefits, improved digestion and reductions in hyperglycemia and hypertension. Hi-Power’s target market focuses on health conscious consumers in China’s fast-growing beverage market.”

Here is a link to an informative 8k dated March 16, 2010 about the Xianghe acquisition. Most of the following discussion is disclosed in this 8K. In this link, we discuss specifically where in the 8K we get supporting material for the statements we make below.

From the 8k, we learn that Xianghe’s product actually originated in January 2009, when Qiu Shang Jing paid Yellow Sea Fisheries Research Institute (YSFRI) $8,776 for “know-how” regarding the development of an algae-based drink. To repeat, Xianghe basically began 1.5 years ago, when Mr. Qiu purchased “know-how” on how to make a certain algae-based drink for eight thousand seven hundred and seventy six dollars.

In April 2009, Mr. Qiu leased office space from CMFO (CMFO waived the rent beginning in July) to set up his new algae-drink company. On July 28, 2009, Mr. Qiu incorporated Xianghe as a legal entity with $43,979 (that’s forty three thousand, nine hundred and seventy-nine dollars). On October 2009, Mr. Qiu contributed an additional $689,504 for a total registered capital of $733,483.

Xianghe was then purchased by CMFO for $27.8mm in November 2009, through a 2-step acquisition that was completed in January 2010.

I’ll repeat the key points. Xianghe began when Mr. Qiu bought “know-how” regarding how to make an algae-based beverage for ~$9k in January 2009. Over the following 9 months, Mr. Qiu contributed an additional ~$733k (with 90% of that in October, one month before the acquisition).

In November, CMFO purchased 80% of Xianghe for $27.8mm.

Based on my calculations, Mr. Qiu achieved a 139,160% annualized return on his investment in the algae drink.

For the avoidance of doubt, here is a graphic representation of what happened.

I find it extremely implausible that a company essentially begun in January 2009 and that received less than $750k of capital in its first 11 months of operation (with 90% of that in the 10th month) would be worth $28mm at the end of the 11th month, unless it had a truly unique patent or technology. Xianghe is a maker of an algae-based beverage. I doubt that this qualifies as a sufficiently unique product that’s worth $28mm purely because of the inherent attractiveness of the product.

Equally absurd is the fact that the “know-how” which Mr. Qiu purchased for $9k is now valued on CMFO’s balance sheet at $23.5mm.

Incidentally, Li Xiaochuan is “the researcher” of YSFRI and also an independent director of CMFO.

More Dubious Financial Statements

Xianghe was begun when “know-how” was purchased in January 2009 for $9k. The company wasn’t actually incorporated until July 28, 2009.

So one would think that Xianghe would have negligible revenue and profit in its first 5 months of operations, correct?

Not according to Xianghe’s financial statements. Keep in mind that Xianghe was audited by CMFO’s same poorly qualified auditor: ZYCPA Company Ltd. ZYCPA, according to its website, has 2 partners and 25 personnel. It received its PCAOB designation in December 2008.

Between July 28, 2009 and December 31, 2009, Xianghe claims to have generated $7.6mm in revenue, $3.0mm in gross profit, $1.7mm of net profit and $1.2mm of cash flow of operations.

With approximately $742k of equity capital (comprised of $9k for know-how in January 2009, $44k of cash contribution on July 28, 2009 and $689k of cash contribution on October 8, 2009), Xianghe was somehow able to generate $7.6mm of revenue and $1.2mm of cash flow from operations in its first 5 months of operations, from selling an algae-based beverage.

Again, I’ll demonstrate my points with a graphical representation:


The financial statements for Xianghe provided in the 8K that is “audited” by ZYCPA are indisputably fraudulent. The Xianghe story is completely implausible, and any investors who think otherwise simply didn’t take the time to read the March 8K. Xianghe does exist and does make algae-based drinks. But it is not worth remotely close to $28mm and it did not generate remotely close to $7mm of real revenue in its first 5 months of operations. The numbers, like those of CMFO, are fabricated.

The acquisition of Xianghe served as a way for the creators of CMFO to justify a $30mm equity capital raise in January 2010. The vast majority of the $28mm that was used to purchase Xianghe was either redirected to personal bank accounts or used for some other dubious purpose.


At the time of writing, I and affiliated entities have a short position in CMFO and a long position in YUII. I intend to trade in these securities subsequent to this post. I may also initiate positions in other stocks mentioned in this article, including CSKI and LIWA.

In no part of this post do I attempt to provide false or misleading information. All facts presented in this post are true to the best of my knowledge.  All opinions presented on this website are my own and accurately reflect my actual opinion on the relevant subject being discussed. To the extent you believe I have provided false or misleading information, please list your concerns in the comments section and I will address them.

Written by chinesecompanyanalyst

June 4, 2010 at 8:31 am

Posted in Chinese RTOs

References for “CMFO and Xianghe” article

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This post is meant to serve as reference material for some of the discussion points in my post “CMFO and Xianghe: A Dubious Acquisition”.

I’m going to provide the primary source material behind various statements that I make in “CMFO and Xianghe: A Dubious Acquisition”. Most of the source material is from the Amended 8K that CMFO filed on March 16, 2010.

I will list the statement in italics, and then the supporting language from the SEC filing on which I base that statement.


Xianghe’s product actually originated in January 2009, when Qiu Shang Jing paid Yellow Sea Fisheries Research Institute (YSFRI) $8,776 for “know-how” regarding the development of an algae-based drink.

Support from 8K dated 3/16/10:

“In January 2009, Mr. Qiu paid on behalf of [Xianghe] an amount of $8,776 (equivalent to RMB 60,000) to Yellow Sea Fisheries Research Institute (YSFRI), Chinese Academy of Fishery Sciences for the development of the algae-based drink know-how.”



In April 2009, Mr. Qiu leased office space from CMFO (CMFO waived the rent beginning in July) to set up his new Algae-drink company.

Support from 8K dated 3/16/10:

“In April 2009, the director and sole owner of the Company, Mr. Qiu leased an office space under an operating lease with Shishi Huabao Jixiang Water Products Co., Ltd (“Jixiang”) for a term of 3 years with fixed monthly rental, expiring in April 2012. According to a release letter signed between Jixiang and the Company, [Xianghe] was released from paying any rental for the period from July 28, 2009 (Inception) to December 31, 2009.”



On July 28, 2009, Mr. Qiu established Xianghe as a legal entity with $43,979 (that’s forty three thousand, nine hundred and seventy-nine dollars). On October 2009, Mr. Qiu contributed an additional $689,504 for a total registered capital of $733,483.

Support from 8k dated 3/16/10:

At the date of inception on July 28, 2009, the registered capital of the Company was $43,979 (RMB300,000), which was fully paid-up by Mr. Qiu.

On October 8, 2009, the Company approved to increase its registered capital from $43,979 to $733,483 (equivalent to RMB5,000,000) by additional cash contribution.

As of December 31, 2009, the registered and paid-in capital totaled $733,483.



Equally absurd is the fact that the “know-how” which Mr. Qiu purchased for $9k is now listed on CMFO’s balance sheet as $23.5mm.

Support from 10Q from 3/31/10:

The “know-how” is valued at $23,471,410



Content of section titled “More Dubious Financial Statements”

Support from 8K:

From the audited financial statements of Xianghe provided in the 8K

Written by chinesecompanyanalyst

June 4, 2010 at 8:31 am

Posted in Chinese RTOs

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