CCME: can you poke a hole?

[claphands22]

CCME shares have been halted due to a pending new announcement.

 

 

http://www.thestreet.com/story/11040973/1/china-mediaexpress-shares-halted.html

 

 

Been watching this story for ages...would appreciate some closure =P

[given2invest]

Sadly, it's most likely that the auditor didn't sign off on financials.  And the people who will lose most/all the money are the yahoo message board folks.  SEC is asleep at the wheel...

[Myth465]

And the moment we have all been waiting for ....

 

The real question is who is still holding shares - short or long?

[given2invest]

A stock halted in the morning and throughout the day without a release has a 99% chance of being disastrous news. 

[given2invest]

A stock halted in the morning and throughout the day without a release has a 99% chance of being disastrous news. 

[given2invest]

Myth,

 

Ya my 80%-fraud quote was from Lei Zhang.  Anyways, I don't think you literally put a 2% probability of fraud based on the thread title.. just that you phrased it that way.  Btw, I like your thesis on Petrobank and have entered a considerable position.

 

 

Tim,

Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position. 

 

I think the company has some moat, not large but some.  Their large bus network provides a valuable ad distribution network that's not matched by many competitors.  This will allow them to retain the customers even if they lose their monopoly status.  They also seem to have good relationships with governments which are hugely beneficial in doing businesses in China.  I agree profit margin will reduce in future years since concession fees CCME pays to bus operators increases at a high rate annually, but the continued increase of ad rates and number of buses should mitigate this.  Of course all of these hinge on the company is what it claims to be.

 

"Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position.  "

 

Not to rub salt in your wounds (we don't even know why it's halted) but did it occur to you that the day deloitte resigns or Starr exits CCME is a sub $2 stock?  Starr is the only reason people aren't 100% sure it's a fraud.  I learned a few years ago when I invested in a company that's called optionable that just cause a smart, large, outside investor buys a stake in something doesn't mean it's not a fraud.  A multi billion dollar exchange, CME I think, bought a big stake in it and it ended up being a 0. 

[given2invest]

its over

 

very sad

 

China MediaExpress Holdings, Inc. Announces Resignation of Independent Auditor and Chief Financial Officer

 

FUJIAN, China, March 14, 2011 /PRNewswire-Asia/ -- China MediaExpress Holdings, Inc. (NASDAQ: CCME) ("CME" or "Company"), China's largest  television advertising operator on inter-city and airport express buses, today announced that the Company's registered independent accounting firm, Deloitte Touche Tohmatsu ("DTT") has formally resigned its engagement by the Company as of March 11, 2011. Following the receipt of the DTT resignation letter, on March 13, 2011, the Company received notice of the resignation of Jacky Lam from his position as Chief Financial Officer and director of the Company, effective immediately. As a result, CME will delay its fourth quarter earnings release and will not file its Form 10-K for the fiscal year ended December 31, 2010 by March 16, 2011, its original due date.

 

 

The DTT resignation letter stated that DTT was no longer able to rely on the representations of management, and recommended that certain issues encountered during the audit be addressed by an independent investigation. DTT's letter also stated that these issues may have adverse implications for the prior periods' financial reports and that, in their view, further investigatory procedures would be required to determine whether the prior periods' financial reports are reliable. Upon receipt of the formal DTT resignation letter, the Company requested the suspension of trading in the Company's common stock on the NASDAQ Global Market to permit full disclosure of DTT's resignation to be disseminated to the public.

 

The Board of Directors of the Company met over the weekend of March 12-13 and confirmed its intent to authorize an independent committee of the Board to launch an investigation with respect to the concerns of DTT, which committee would be authorized to engage a forensic accounting firm and independent legal advisors, and initiate a search for a new CFO a new independent auditor. The Company expects that the announcement of final results for 2010 and the filing of its Annual Report on Form 10-K could be delayed for at least a month to permit the completion of all necessary fieldwork of the new independent auditor and to complete the independent investigation of several potential issues raised in the DTT resignation letter.

 

 

 

 

[Myth465]

I hate to say it, but ok I wont say it.

Instead I would like to quote one of our great presidents.

 

GW Bush - Fool me once, shame on — shame on you. Fool me — you can't get fooled again.

 

Some how I seem to understand where he is coming from. Was anyone holding shares?

[manualofideas]

They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings.

 

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud.  They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?).  Here is how CXTI did it:  The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009.  The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so.  The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs.  So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand.  

 

This seems to be what CXTI did -- they disclosed a relatively modest cash number in the yearend audited financials (this was cash from the IPO or something like that).  Then in the unaudited quarterly financials they made it look like cash was growing by leaps and bounds and the company was performing incredibly well.  By the time the next year's audited financials were due, management had stolen the actual cash that was there and was gone without a trace, and U.S. investors (including Jeff Feinberg's fund) were left holding the bag.  There was never any kind of justice nor did U.S. investors see a penny.

 

What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009.  At December 31, 2009 cash was $57 million.  Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

 

I don't get to toot my own horn too much, but in this case, I think the analogy to CXTI was spot on.  Back in September I said that the CCME fraud could go on until the audited annual financials were due.  I think this type of fraud should be added to everyone's mental model -- just because the unaudited quarterly financials look good, it doesn't mean that the audited annual financials will look as good or even be released -- ever.

[Myth465]

MOI I think you should toot your horn. That was a great call.

[Ballinvarosig Investors]

They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings.

 

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud.  They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?).  Here is how CXTI did it:  The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009.  The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so.  The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs.  So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand.  

 

This seems to be what CXTI did -- they disclosed a relatively modest cash number in the yearend audited financials (this was cash from the IPO or something like that).  Then in the unaudited quarterly financials they made it look like cash was growing by leaps and bounds and the company was performing incredibly well.  By the time the next year's audited financials were due, management had stolen the actual cash that was there and was gone without a trace, and U.S. investors (including Jeff Feinberg's fund) were left holding the bag.  There was never any kind of justice nor did U.S. investors see a penny.

 

What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009.  At December 31, 2009 cash was $57 million.  Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

 

I don't get to toot my own horn too much, but in this case, I think the analogy to CXTI was spot on.  Back in September I said that the CCME fraud could go on until the audited annual financials were due.  I think this type of fraud should be added to everyone's mental model -- just because the unaudited quarterly financials look good, it doesn't mean that the audited annual financials will look as good or even be released -- ever.

I was thinking of your words when trading was suspended ;D It got me thinking. Since these fraud's are so easily spotted, surely it's a simple case of shorting them at the start of the new year - waiting two or three months for the auditors to come calling, have the fraud exposed and make a lot of easy money? You'd have to be fairly certain the company was a fraud, of course.

[given2invest]

They have a real auditor and a growing cash pile. If the company was a fraud, there is no way in hell that Deloitte and Touche would not have unearthed the inconsistency in their findings.

 

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud.  They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?).  Here is how CXTI did it:  The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009.  The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so.  The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs.  So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand.  

 

This seems to be what CXTI did -- they disclosed a relatively modest cash number in the yearend audited financials (this was cash from the IPO or something like that).  Then in the unaudited quarterly financials they made it look like cash was growing by leaps and bounds and the company was performing incredibly well.  By the time the next year's audited financials were due, management had stolen the actual cash that was there and was gone without a trace, and U.S. investors (including Jeff Feinberg's fund) were left holding the bag.  There was never any kind of justice nor did U.S. investors see a penny.

 

What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009.  At December 31, 2009 cash was $57 million.  Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

 

I don't get to toot my own horn too much, but in this case, I think the analogy to CXTI was spot on.  Back in September I said that the CCME fraud could go on until the audited annual financials were due.  I think this type of fraud should be added to everyone's mental model -- just because the unaudited quarterly financials look good, it doesn't mean that the audited annual financials will look as good or even be released -- ever.

I was thinking of your words when trading was suspended ;D It got me thinking. Since these fraud's are so easily spotted, surely it's a simple case of shorting them at the start of the new year - waiting two or three months for the auditors to come calling, have the fraud exposed and make a lot of easy money? You'd have to be fairly certain the company was a fraud, of course.

 

1) CCME wasn't borrowable recently and if you did get any shares the rebate was neg 80-100

2)  The puts were INSANELY expensive so you'd have to time it perfectly.  But yah, buying march puts would have worked. 

[Guest]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

[given2invest]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

 

:(

 

[Guest]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

 

:(

 

 

why's that? it's certainly speculative, but it's still asymmetrical. if the market misprices risk, it could pay off, especially with leaps.

[claphands22]

Congrats to all the shorts!  I wonder when all the shares will start trading again. What would happen if you bought puts in March but the shares don't start trading until April?

 

It's going to be hectic for all the other Chinese small caps from here on out.

[gokou3]

Myth,

 

Ya my 80%-fraud quote was from Lei Zhang.  Anyways, I don't think you literally put a 2% probability of fraud based on the thread title.. just that you phrased it that way.  Btw, I like your thesis on Petrobank and have entered a considerable position.

 

 

Tim,

Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position. 

 

I think the company has some moat, not large but some.  Their large bus network provides a valuable ad distribution network that's not matched by many competitors.  This will allow them to retain the customers even if they lose their monopoly status.  They also seem to have good relationships with governments which are hugely beneficial in doing businesses in China.  I agree profit margin will reduce in future years since concession fees CCME pays to bus operators increases at a high rate annually, but the continued increase of ad rates and number of buses should mitigate this.  Of course all of these hinge on the company is what it claims to be.

 

"Yes all along I am on high alert for fraud.  I will be the first seller if one day Deloitte resigns as auditor or Starr exits their position.  "

 

Not to rub salt in your wounds (we don't even know why it's halted) but did it occur to you that the day deloitte resigns or Starr exits CCME is a sub $2 stock?  Starr is the only reason people aren't 100% sure it's a fraud.  I learned a few years ago when I invested in a company that's called optionable that just cause a smart, large, outside investor buys a stake in something doesn't mean it's not a fraud.  A multi billion dollar exchange, CME I think, bought a big stake in it and it ended up being a 0. 

 

Well, I guess I have been proven wrong. Lessons learned... top notch auditor or reputable investor don't mean a thing, especially when it comes to investing in emerging markets.

[benhacker]

Lessons learned... top notch auditor or reputable investor don't mean a thing, especially when it comes to investing in emerging markets.

 

To be blunt, I don't think you learned the right lesson.

 

A businesses' numbers have to make sense, and management should act rationally if their business is trading at a crazy price (where were the huge buybacks with all that supposed cash they were making?).  You can't blame this one on the auditor... the numbers didn't make any sense, and it was all over the internet for any to see that was the case.... why do insanely profitable companies go public via reverse mergers (a regulatory dodge) to sell themselves to retail US investors????

 

ANSWER: They don't... frauds do.

 

Oh yeah, and this fraud was perpetuated in the US, not in emerging markets.

 

We all have to own our mistakes, the auditors don't get to be your shield on this one... Starr is a tough one, but we all have to do our own research.  By the way, the 10-Q's weren't even audited, which as MOI pointed out is why the fraud went down now (10-K time).

 

Ben

[Ballinvarosig Investors]

By John Hempton, a Sydney-based investor, recovering financial services analyst, and former Australian government official who writes at Bronte Capital

 

I met Hank Greenberg in late 2000. He was chatting mostly to Ajit Jain – the Berkshire Hathaway reinsurance impresario and I was a spare wheel. But Hank was I thought the most impressive person I had ever met. He name-dropped shamelessly (he had had just flown back to New York on a private jet after “chatting” with Li Peng). But he was so far ahead of me on so many issues it made me feel dumb. He even looked – at least in the brief conversation – as if he were considerably smarter than Ajit Jain – and Ajit is no intellectual slouch.

 

I was just out of my league…

 

Anyway there is a view around AIG – a view that I shared – that AIG was built in the mold of Hank and it required Hank – a certified genius and an unbelievable workaholic – to keep it all together. AIG you see had a single risk control mechanism: Hank.

 

In this view Elliot Spitzer by causing the demise of Hank Greenberg caused the demise of AIG – and by extension the demise of the entire financial system.

 

I thought that might be going a bit far – but it is hard to argue against the proposition that AIG got much more risky without Hank around.

 

And the stories were legion too. I know someone who was on a trading floor for AIG in Taiwan. There was a big error and it potentially exposed AIG to hundreds of millions in losses. Everyone was kept silent because if it leaked then people would front-run AIG closing their position and thus increasing their losses. People slept at their desks.

 

But the next morning – fresh off the private jet from New York – there was Hank. He had come to take control of the situation – and he stood behind traders as they solved the problems for minimum losses.

 

Hank was the man.

 

Now Hank is only a couple of percent the man he used to be. His multi-billion dollar holding of AIG has been reduced to its last few hundred million. His main asset is Starr Asia – a holding company for a variety of Asian investments (and some old AIG stock). It was through AIG that Hank made his investment in China Media Express (CCME).

 

At peak Starr’s investment in CCME was worth over $60 million. This is nothing to the Hank of old – but the new diminished Hank probably thinks that $60 million is a lot of money. It might even be a reasonable proportion of Hank’s fortune. As recently as January 2010 Starr dropped another $30 million into CCME. And by that time CCME was a controversial company.

 

The demise of CCME

 

I wrote that China Media Express was either (a) one of the best businesses in the history of capitalism or (b) one of the most brazen frauds in the history of capitalism.

 

Given the auditor has resigned and is suggesting fraud, the company is suspended and well – all sorts of other ugliness – we know which now. It was one of the most brazen frauds in the history of capitalism.

 

And we know who was the biggest victim: Hank Greenberg.

 

And given Hank’s much dimiished status this was not chump change. It was a meaningful hit.

 

If your one-man-risk-control unit can be fooled by something so obvious then why couldn’t it also be fooled by someone offering 25 bps extra carry by double-levering life insurance statutory funds into the AAA strips of subprime securitizations?

 

China Media Express – apart from being a really fun story – punctures the last Hank Greenberg myth – a myth that I personally believed.

 

John

 

PS. I think we can conclude that Ajit Jain really was the most impressive person at that table. I sure as hell wasn’t.

[Myth465]

Smart observers of the market for shares of Chinese Companies that have acquired US shell companies say that virtually all of these are frauds.  Therefore, the correct mindset should be: prove that one of these companies isn't a fraud.  Proving a negative like this is a near impossibility, practically, and an absolute impossibility using Popper's logic.  Therefore, a prudent value investor shouldn't even kick the tires of these companies.

 

Exactly. You seem rather dismissive of any point raised. I think we just have to wait and see. Only time will tell. Eventually there will be an I told you so and a huge capital gain or capital loss.

 

Prehaps, but there is no margin of safety here, just the suspension of critical thinking, replaced by wishful thinking that, like a prisoner on trial, the company is innocent until proved guilty, even though observed at the scene of the crime, performing the same actions as others who have already been convicted. This isn't a trial. This is like Buffett's no called strikes baseball game.  Why would any batter concerned with having a good average even think about swinging at a pitch that looks like it could be a wicked screwball?

 

This is the proper lesson inmo.

[enoch01]

 

A businesses numbers has to have that make sense, and management should act rationally if their business is trading at a crazy price (where were the huge buybacks with all that supposed cash they were making?).  You can't blame this one on the auditor... the numbers didn't make any sense, and it was all over the internet for any to see that was the case.... why do insanely profitable companies go public via reverse mergers (a regulatory dodge) to sell themselves to retail US investors????

 

ANSWER: They don't... frauds do.

 

Ben

 

Correct.  Fantastic point Ben.

[given2invest]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

 

:(

 

 

why's that? it's certainly speculative, but it's still asymmetrical. if the market misprices risk, it could pay off, especially with leaps.

 

BECAUSE ITS A COMPLETE FRAUD!!!!! THERE IS NO LEVEL THAT IT WOULD BE A BUY AT!!!!!!!!! 

 

There is no real underlying business, no real profits!  And the fact that you could suggest wanting to buy leaps after all of this, at any level, makes me sad as a result. 

[given2invest]

Lessons learned... top notch auditor or reputable investor don't mean a thing, especially when it comes to investing in emerging markets.

 

To be blunt, I don't think you learned the right lesson.

 

A businesses numbers has to have that make sense, and management should act rationally if their business is trading at a crazy price (where were the huge buybacks with all that supposed cash they were making?).  You can't blame this one on the auditor... the numbers didn't make any sense, and it was all over the internet for any to see that was the case.... why do insanely profitable companies go public via reverse mergers (a regulatory dodge) to sell themselves to retail US investors????

 

ANSWER: They don't... frauds do.

 

Oh yeah, and this fraud was perpetuated in the US, not in emerging markets.

 

We all have to own our mistakes, the auditors don't get to be your shield on this one... Starr is a tough one, but we all have to do our own research.  By the way, the 10-Q's weren't even audited, which as MOI pointed out is why the fraud went down now (10-K time).

 

Ben

 

Excellent post.  In a post Enron world, it's amazing how so many hung their hat on the auditor and a bucket research shop (global hunter) and dismissed the short reports as "blogs".  The Starr investment is the sole reason the stock got any traction.  I wonder if the people there realize how much their investment cost the average Joe who followed them into the fraud. 

 

I was thinking yesterday - imagine if 200 shitty US small cap frauds that couldn't get listed in the US all listed on the Chinese exchange and sold billions of fraudulent stock to Chinese investors...do you think the Chinese government would just sit by and watch?  Our regulators are a fucking joke. 

[Myth465]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

 

:(

 

 

why's that? it's certainly speculative, but it's still asymmetrical. if the market misprices risk, it could pay off, especially with leaps.

 

BECAUSE ITS A COMPLETE FRAUD!!!!! THERE IS NO LEVEL THAT IT WOULD BE A BUY AT!!!!!!!!!  

 

There is no real underlying business, no real profits!  And the fact that you could suggest wanting to buy leaps after all of this, at any level, makes me sad as a result.  

 

Lol I understand the sad face now.

 

Excellent post.   In a post Enron world, it's amazing how so many hung their hat on the auditor and a bucket research shop (global hunter) and dismissed the short reports as "blogs".  The Starr investment is the sole reason the stock got any traction.  I wonder if the people there realize how much their investment cost the average Joe who followed them into the fraud. 

 

I was thinking yesterday - imagine if 200 shitty US small cap frauds that couldn't get listed in the US all listed on the Chinese exchange and sold billions of fraudulent stock to Chinese investors...do you think the Chinese government would just sit by and watch?   Our regulators are a fucking joke. 

:-[

[Guest]

what do you guys think about buying calls on this afterwards?  I mean, they should be super cheap. They might go out a business, or they'll bring in someone who can turn it around. Just because it's fraudulent, doesn't the company is worth $0.

 

:(

 

 

why's that? it's certainly speculative, but it's still asymmetrical. if the market misprices risk, it could pay off, especially with leaps.

 

BECAUSE ITS A COMPLETE FRAUD!!!!! THERE IS NO LEVEL THAT IT WOULD BE A BUY AT!!!!!!!!! 

 

There is no real underlying business, no real profits!  And the fact that you could suggest wanting to buy leaps after all of this, at any level, makes me sad as a result. 

 

I try to look for potential value. just because something looks bad, doesn't mean it's a bad investment if you get it cheap enough.

 

Even the muddy waters guys say it's worth around $3.50 or so even in the case of fraud.

 

http://www.muddywatersresearch.com/research/ccme/irrefutable-evidence/