Qihoo plans legal action against Citron
Qihoo 360 Technology Co. Ltd. (“Qihoo 360″ or the “Company,” NYSE: QIHU), a leading Internet company in China, today initiate legal procedure against Citron Research and its main contributor Mr. Andrew Left (“Citron”). The Company has sent a letter to Citron and demands Citron immediately cease and desist from committing any and all improper and/or illegal activities in relation to its untruthful publications or statements regarding Qihoo 360. Without limiting the generality of the forgoing, the Company demands Citron (1) correct or remove those untruthful sections in the Publications within ten (10) days upon the receipt of the letter, and (2) apologize to Qihoo 360 for Citron’s undue activities. Qihoo 360 reserves its right to pursue further legal remedies.
Source: Qihoo’s announcement on Sina Weibo
Kai-Fu Lee initiates legal action against Citron
I wrote a fact-based report challenging Citron’s reports on China search companies. Citron has not explained any of the errors I brought up, but instead has attacked me personally with accusations that have no factual basis and are not truthful. Such malicious statements have been deliberately and publicly made in order to damage my reputation, in an attempt to avoid address my criticisms of Citron’s report. I have no choice but to file a lawsuit against Citron and Mr. Andrew Left.
We, a group of nine Chinese gaming companies, join forces to take up Citron on its recent challenge that Qihoo’s ARPU claim of 400 RMB is fraudulent, “demonstrated” by Citron’s comparisons with other gaming companies in its reports. We prove here that Citron’s analysis lacked basic understanding of the Chinese gaming market. Citron compared different types of companies against each other, and didn’t even understand how ARPU is measured (!). We pooled our gaming statistics together to form a trusted third-party validation of gaming ARPU for Qihoo and its true peers, and we found that: 1) Qihoo’s ARPU is just about average in a group of five comparable gaming platform companies, and 2) The average ARPU of a large number of popular games on the Qihoo platform is also in line with Qihoo’s reported number. Like the earlier reports published on www.citronfraud.com, this report once again shows that Citron knows very little about Chinese market and companies, and that its analysis is as amateurish as its claims outrageous.
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By LORETTA CHAO
BEIJING—A number of prominent technology leaders in China, including current and former executives from Google Inc. and Microsoft Corp., are mounting an offensive against short seller Citron Research, protesting a spate of what they call unfair and inaccurate attacks on U.S.-listed Chinese companies.
Led by Kai-Fu Lee, former head of Google’s operations in the country, a group of more than 60 executives, investors and entrepreneurs signed a letter accusing China-focused short sellers—particularly Citron—of “targeting legitimate companies with either no problems or minimal problems,” manipulating information to write reports that “boldly tell lies, knowing that their American readers have no way of verifying them.” Mr. Lee is one of the most prominent technology executives in China, and currently runs an incubator for technology start-ups called Innovation Works.
In an interview, Mr. Lee said he fears that what he considers baseless allegations by Citron and others will make it “harder and harder for Chinese companies to go public in the U.S., which is neither good for China nor the U.S.”
The group has created a new website, Citronfraud.com. The focus is in part on Citron’s criticism of antivirus software and Internet-services provider Qihoo 360 Technology Co., listed on the New York Stock Exchange. Qihoo 360 Chief Executive Zhou Hongyi is one of the letter’s signees.
“Movements only evolve around real threats,” said Andrew Left, founder of Citron, who said Mr. Lee has distorted his reports. “If what I wrote was false, then you wouldn’t need a movement around it … I am more than happy to defend [my statements] in a court of law.” Mr. Left said he has shorted Qihoo, but didn’t disclose the size of his position.
Mr. Left also pointed out that an investor in Mr. Lee’s incubator, Sequoia Capital, is also a Qihoo backer.
Mr. Lee, who said he doesn’t own Qihoo shares, confirmed that Sequoia is his investor, and added that Qihoo and Qihoo competitors are also investors, but said that didn’t have bearing on his decision to take action. “What Citron and other companies like it are doing is creating a prejudice that makes it difficult for companies we invest in to go public … that’s the agenda.”
The group of signees includes a number of prominent venture-capital and angel investors in China. Such investors provide funding for start-ups and stand to profit heavily if the companies sell shares to the public. Among the notable members is Zhang Ya-Qin, chairman of Asia-Pacific research and development for Microsoft.
Short sellers borrow shares to sell them with the hope of buying them back at a lower price and pocketing the difference, so they stand to benefit from causing share prices to drop. Investigations by short sellers have triggered a wave of delistings of Chinese companies by U.S. stock exchanges and the U.S. Securities and Exchange Commission.
This has cast a cloud over Chinese companies listed in the U.S., and analysts say it is in part the reason why share prices of larger companies have come down as well, including prominent U.S.-listed Chinese Internet firms like online video company Youku Tudou Inc. and Sina Corp, owner of the Weibo microblogging service.
“Obviously, short selling is good” and these sellers have been “exposing problems and companies with issues,” said Fan Bao, chief executive of investment bank China Renaissance Partners, who signed the letter. “But it got to a point where they are very indiscriminating, and are, in our opinion, going after some good companies.”
The group’s assertions will likely renew focus on the state of corporate research in China. In recent months, the Chinese government has made it more difficult to access financial information, including audited reports, for private companies as part of a broad information crackdown. Some investors say that has added to the already difficult task of ascertaining the state of company finances and operations.
“It’s very difficult to get the truth” about Chinese companies, said Mr. Left, whose research group has written about several firms that have been delisted and investigated. “Many times it’s not as transparent as it should be.”
Among other things, Citron alleges that Qihoo 360 overrepresented average gaming revenue per user and other financial data, and that it lacks the infrastructure and experience to run a successful search business. Mr. Zhou, Qihoo’s CEO, denies misrepresenting any numbers, saying that if he did so it would be apparent to Qihoo’s dozens of partners who share revenue with the company.
As for Citron’s assertions about Qihoo’s potential in the search business relative to competitors, Mr. Lee says Citron makes erroneous comparisons and lacks a “basic understanding” of the Chinese Internet market.
Mr. Left said he stands by his track record, and added that he has been looking at the Chinese market for years and uses respected third-party research in his reports. Citron says on its website that it has researched and published information on 20 Chinese companies. It says the majority have suffered significant losses in share price and seven have been delisted.
“In the beginning, short sellers were serving a very good purpose for the environment because of a lot of fraud that they exposed,” said Mr. Lee. But “a lot of companies are legitimate, and people are feeling that this speculation has been hurting otherwise innocent companies…as well as the general trust in any Chinese company.”
Mr. Bao of China Renaissance Partners said some of his clients are already asking about alternative listing options. “Whereas the U.S. was the default” place to go public for Chinese start-ups, the coming year will “be the real test” to see where “some of the [initial public offering] candidates in the pipeline decide to IPO. You’ll see a lot more variety of choice.”
The signees also include Wang Xiaochuan, chief executive of Sogou, the search unit of Nasdaq-listed Sohu.com Inc.
Sohu.com isn’t among the companies criticized by Citron—the short seller actually praised the firm, calling it “the most compelling investment of any China technology company trading in the U.S.”
By Bloomberg News
(Corrects to remove inaccurate reference to 360buy investor and corrects job title of Microsoft’s Zhang in third paragraph of story originally published Sept. 4)
A group of 61 Chinese entrepreneurs and executives signed an open letter accusing Citron Research and other short-sellers of manipulating information and misleading investors in reports about Chinese companies.
Short-sellers “take advantage of the information asymmetry between China and the U.S., and boldly tell lies, knowing that their American readers have no way of verifying them,” according to the letter, which has been posted to an English- language website created for an “ongoing fight against” short sellers.
Executives who signed the letter include Lee Kai-fu, former head of Google Inc. (GOOG)’s operations in China, Zhang Ya-qin, chairman of Microsoft Corp. (MSFT)’s research and development in Asia, and Liu Qiangdong, founder and chief executive officer of 360buy Jingdong Mall.
The iShares FTSE China 25 Index Fund (FXI), the biggest Chinese exchange-traded fund in the U.S., has fallen 5.2 percent this year as Citron Research, Muddy Waters LLC and other short sellers published reports on companies including New Oriental Education & Technology Group Inc. (EDU) The Standard & Poor’s 500 Index has gained 11.9 percent during that same period.
In response, Citron posted a statement on its website saying that the “attack” ignored its track record of “exposing wrongdoing in both Chinese and U.S. companies.” Short selling involves the sale of borrowed stock to profit from a subsequent decline.
Citron’s recent targets include Evergrande Real Estate Group Ltd. (3333), which last month reported a 21 percent decline in its first-half underlying profit. In a June report, Citron said the Chinese developer “has used accounting tricks and bribes to hide the fact that it is truly insolvent.” Evergrande denied the report, said its cash flow is sufficient and filed a police report in Hong Kong over allegations.
By Chen Limin ( chinadaily.com.cn)
A group of 61 Chinese Internet industry leaders complained about short seller Citron Research in a joint letter dated Sept 4 for what they called unfair and inaccurate attacks on Chinese companies listed in the US.
The move came after several short sellers published negative reports on Chinese companies, some of which eventually forced Chinese companies to delist.
While some reports “discovered problems in the Chinese companies”, some China-focused short sellers, especially Citron, “started targeting legitimate companies with either no problems or minimal problems”, the joint letter said.
“Their reports would take advantage of the information asymmetry between China and the US, and boldly tell lies, knowing that their American readers have no way of verifying them.”
The letter followed Citron’s report about Qihoo 360 Technology Co, a popular Web-browser company that entered the Web-search sector last month.
The letter-writing group, which includes executives, investors and entrepreneurs, is led by Kai-Fu Lee, the former head of Google Inc’s operations in China.
Citron founder Andrew Left defended his company’s reports.
“Movements only evolve around real threats,” Left said, according to a Wall Street Journal report. He added that Lee has distorted his reports.
“If what I wrote was false, then you wouldn’t need a movement around it. … I am more than happy to defend (my statements) in a court of law,” he was quoted as saying.
The Chinese industry leaders also created a new English-language website, Citronfraud.com, to point out what they consider false statements about Chinese companies.
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by Kai-Fu Lee
Citron has used (provably incorrect) personal attacks on me to shift investors’ attention away from the core issue – that Citron lacks basic understanding about China, and fabricated or exaggerated false data to mislead investors. Below are ten questions for Mr. Andrew Left. Please answer them directly and don’t mince words.
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Chinese Backlash Hits Short Seller
BY LORETTA CHAO
BEIJING—A number of prominent technology leaders in China, including current and former executives from Google Inc. and Microsoft Corp., are mounting an offensive against short seller Citron Research as they protest a spate of what they call unfair and inaccurate attacks on U.S.-listed Chinese companies.
Led by Kai-Fu Lee, former head of Google’s operations in the country, a group of more than 60 executives, investors and entrepreneurs signed a letter accusing China-focused short sellers—particularly Citron—of “targeting legitimate companies with either no problems or minimal problems,” manipulating information to write reports that “boldly tell lies, knowing that their American readers have … [Link to the full story]
Chinese Business Leaders Condemn Citron
Citron is an “investment analysis company” owned by Mr. Andrew Left, a man with a long record of fraud, deceit, and unlawful behavior. Citron’s reports take advantage of the information asymmetry between China and the US, and boldly tell lies, knowing that their American readers have no way of verifying them.
We are investment professionals and company founders/executives in China. We are joining together in this effort to expose and condemn the deception and ignorance of Citron and other short sellers like them. This English website (citronfraud.com) is being created to host this ongoing fight against fraud.
We urge investors to seek trustworthy professionals for investment advice regarding Chinese companies, and not rely on institutions and individuals with fraudulent history, falsified expertise, and interest conflict.
To Whom It May Concern:
For the past few years, a number of “China Short Sellers” have been publishing negative reports on Chinese companies (typically listed in the US). When these reports were accurate and discovered problems in the Chinese companies, they have helped cleanse the environment.
However, recently some of these “China Short Sellers” started targeting legitimate companies with either no problems or minimal problems. Their reports would take advantage of the information asymmetry between China and the US, and boldly tell lies, knowing that their American readers have no way of verifying them. An example of such a report is Short Seller Citron Research’s report “Qihoo’s entry into search puts SOHU in play“, which has been critiqued by Dr. Kai-Fu Lee in his “China Short Sellers: Exposing Fraud, or Practicing Fraud?” We applaud Dr. Lee’s accurate exposure of Citron’s seven errors of gargantuan proportions.
We are investment professionals and company founders/executives in China. We strongly believe there is a huge pool of legitimate, exciting, and valuable companies in China. Citron and other short sellers’ recent efforts to slam legitimate companies and deceive investors are despicable. We are joining together to expose and condemn the deception and ignorance of Citron and other short sellers like them. This English website (citronfraud.com) is being created to host this ongoing fight against fraud.
Finally, China is not well understood by foreign investors, so we urge investors to seek trustworthy professionals for investment advice regarding Chinese companies, and not rely on institutions and individuals with fraudulent history, falsified expertise, and serious interest conflict.
Signed on behalf of individuals (listed alphabetically within each group): Read more of this article »
Dr. Lee responds to Citron’s Letter of Aug 31
In Mr. Andrew Left’s “point-by-point” response dated August 31, 2012, he completely evaded Dr. Lee’s original seven criticisms, and chose to just mince words. Dr. Lee’s new response below restated the seven clear criticisms, and also pointed out the following new observations from Mr. Left’s letter dated August 31:
- Mr. Left’s unwillingness to engage on the direct accusation that he totally misunderstood Sogou’s product line should be taken as an admission of ignorance
- Mr. Left’s understanding of a company he recommends is at the level of an analyst who says : “Buy Microsoft because the Xbox+Office product will beat PlayStation”.
- Mr. Left made a new statement about market share that is off by a factor of 2-3X!
- Mr. Left admits that he used what he considered fraudulent data in his recommendation, without revealing the “fraud” to new readers.
- Mr. Left comically restates “a valuation of $697M” as “just an opinion that $200M is too low”.
- During a period where company’s market share went from 0% to 10%, while another stayed flat at 4.5%, Mr. Left concludes the two companies’ valuations should increase by exactly the same amount.
On August 31, 2012, Citron’s Andrew Left issued a response to my two letters and seven points. Below are my point-by-point rebuttal to him: Read more of this article »
August 30, 2012
Dear Mr. Left:
Thank you for responding to my letter. To remind you, the main points in my letter were:
- Citron lacked basic understanding of Chinese search market.
- Citron misunderstood Sogou products and combined two products into one.
- Citron compared apples to oranges in its web traffic analysis, and did so unfairly.
- Citron omitted critical data in its financial comparisons of Sohu and Qihoo.
- Citron did not understand search monetization and zeroed $98M of revenue.
- Citron’s video analysis was ludicrous, and missed obvious business issues.
- Citron’s adding market cap from one company to the next was wild and ridiculous.
In your response, you chose only to say that I “did not properly represent” your statements in (4), and for the other six points, you said you did not want to “go back and forth”, and respected my knowledge. Since you have implicitly acknowledged the other six points, I also agree it’s not necessary to “go back and forth” on point (4).
Interestingly, you chose to bring up several other issues which had NOTHING to do with my letter, so I see no need respond. Perhaps someone else will take you up on the 100K RMB offer, and if they do, I hope they will donate the money to an anti-fraud cause.
REFERENCE | Citron Research: Open letter to Kai-Fu Lee Aug 30 [PDF]
(This letter was originally posted on xueqiu.com)