Media Reports Blast Citron for Erroneous Reports

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.

Kai-Fu Lee

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.

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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.

by Xinhua writer Liu Jie

BEIJING, Sept. 5 (Xinhua) — Chinese entrepreneurs’ moves to strike back at U.S. short-sellers have revealed a malicious act: turning a profit at the cost of the reputations and destinies of China’s start-up businesses.

According to a group of 61 Chinese entrepreneurs led by Kai-Fu Lee, former head of Google China, Citron Research and other similar companies have issued negative reports about Chinese companies — some of which have few problems or even no problems at all — so they could make a profit by short-selling the companies’ stocks.

The latest victim is Qihoo 360, a promising anti-virus software and Internet service provider. Citron has issued reports full of inaccurate analyses of the company and the Chinese Internet market, according to Lee.

Lee said Citron lacks a basic understanding of the Chinese Internet and search engine market, distorts data and “compares apples to oranges.” Citron has said it would be happy to defend itself in a court of law.

Lee has written four open letters to Citron, with convincing technical details in the eyes of Chinese IT industry insiders.

In fact, the “blame China” game has been played quite often in contemporary U.S. society. From the presidential campaign to capital markets, painting an ugly face on China helps politicians win votes and helps short-sellers reap fortunes.

However, when basic facts are disregarded, such moves will prove shameful, at best.

To be honest, a small number of Chinese companies have falsified data and reports to woo investors in the U.S. stock market. However, they have paid for their mistakes, as many withdrew from the market last year or saw their share prices plunge.

But that is not the whole picture, as a majority of companies comply with laws and rules.

Citron and other short-sellers have taken aim at growing Chinese businesses, knowing they may not be as familiar to U.S. investors as some big-name companies. They know that due to information asymmetry investors can hardly verify the facts provided in their reports, given the geographical distance and lack of publicity about newer companies.

Industry heavyweights have never been the targets of short-sellers because it is more difficult to smear them. But small businesses have not been so lucky.

In the eyes of many Chinese entrepreneurs, the New York Stock Exchange is an ideal place to go public due to its mature rules and infrastructure. NASDAQ is seen as an incubator for start-up businesses and is admired by both Chinese bosses and investors.

But unjustified attacks on Chinese companies based on unreliable and ludicrous reports to potential investors are likely to shift the opinions of these entrepreneurs.

With the U.S. economy floundering for so long, the United States cannot afford to have a capital market that attracts little interest or participation from Chinese companies.

Therefore, the United States Securities and Exchange Commission needs to seriously investigate the short sellers and treat Chinese companies fairly and honestly for the sake of the U.S. stock market’s own prosperity.

By Wang Xinyuan
Led by former Microsoft and Google executive Kai-Fu Lee, technology and business leaders have launched a campaign to fight back at US short seller Citron Research, blaming the short seller for issuing faulty reports on US listed Chinese stocks Tuesday.

Lee is currently chairman and CEO of Innovation Works, an early stage incubator of high tech companies.

A total of 60 technology and business leaders signed an open letter condemning Citron for practicing fraud rather than exposing fraud. The letter was posted on a newly established website www.citronfraud.com on August 27.

The letter tracked unlawful records of Citron’s founder Andrew Left, stating that the short seller’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 the facts.”

The move to attack the US short seller is aimed at encouraging the Chinese companies to sue the misleading short sellers and tarnish their reputation so that they lose trust of the investors, as well as to prevent them from issuing further fraudulent reports, Lee said in a Sina Weibo interview Tuesday.

“Citron spread rumors in their reports and I have submitted evidence…but I personally cannot sue it (Citron) because they did not short sell my company,” Lee said.

Citron recently released a report titled “Qihoo’s entry into search puts Sohu in play,” in which it accused New York Stock Exchange-listed Chinese antivirus software provider Qihoo 360 of financial fraud. Qihoo 360 chairman and CEO Zhou Hongyi is also among the signees of the open letter.

Lee pointed out that Citron’s report is based on faulty analysis of search engines and lacks basic understanding about the sector.

Andrew Left of Citron rebutted Lee Monday in a message posted on Citron’s website saying Lee is defending Qihoo because Qihoo is Lee’s investor.

“Lee has raised $180 million from a group of investors led by none other than Qihoo 360,” Left said Monday.

But Lee refuted Citron’s allegation Tuesday saying that Qihoo is not an investor in Innovation Works but the smallest passive corporate investor in a fund that Innovation Works co-manages.

“Documents we have submitted to the US Securities and Exchange Commission contain true information and are valid…We reserve the right to take legal action to fight against any fraud accusation and personal attack,” Qihoo said in a statement sent to the Global Times Tuesday.

American investors may not understand some Chinese companies’ unique business models as well as Chinese institutions, and short sellers’ simplistic reports without adequate field research may mislead investors, Li Weidong, research director at consultancy ChinaVenture, told the Global Times.

There are numerous institutions issuing research reports in the US and investors trust them, Li said.

Like US-based Muddy Waters, Citron is known for first selling shares of companies which it believes are misleading investors and write a negative report to prompt others to sell in panic, and then buys back at much lower prices and makes lucrative profits quickly.

Citron began attacking Chinese stocks in 2006 with good record when back-door listings or reverse mergers exposed a number of fraudulent Chinese companies in the US.

But with tightening rules in both China and the US, it has been getting hard for Citron to find fraudulent Chinese companies, and it has gone so far as to spread rumors through negative reports on legitimate stocks, according to citronfraud.com.

A bunch of Chinese business leaders have grouped together to set up CitronFraud.com, a site dedicated, it says, to exposing “the lies Citron tells about China.” Citron Research is a financial analysis firm and short seller that, says the group of over 60 businesspeople in their first collective post, routinely practices “deception” in its attacks on US-listed Chinese stocks. The post goes on to explain:

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. […] 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.

Attacked by Chinese tech leaders: Citron Research founder Andrew Left

The Citron slam got personal very quickly, as Citron’s founder Andrew Left (pictured right) was branded “a man with a long record of fraud, deceit, and unlawful behavior.” That includes how Andrew was fired from his first ever job in 1998 for misleading and defrauding customers, as ruled by an investigation by the National Futures Association. Just fours year later he departed the role of CEO at Detour Media after the company “sued him for stealing six checks worth about $25,000.” The CitronFraud site asks:

One has to wonder why an investor would trust the investment advice of someone with a record of fraud, deceit, and unlawful behavior.

But, hey, we’re talking about the financial trading sector here, so that’s a bit like asking why one weasel mates with another.

Who’s behind CitronFraud? Among the many signed names are the CEOs of major Chinese tech firms – usually the kind of stock that Citron and other short sellers like Muddy Waters attack in their reports – as well as investment groups. Unsurprisingly, the biggest victim of Citron’s recent four reports is on the list: Zhou Hongyi, CEO of Qihoo 360 . Also in the group is the former head of Google’s China operations, Kai-Fu Lee, who first took umbrage with Citron last week when he pointed out a number of factual errors in its report on the search engine Sogou.com.

A bit like Fox News being anything but fair and balanced, we have long since noted that Citron seemed to lack a true understanding of China’s web scene, and this new site should be a useful check-and-balance on the short sellers’ claims, and a useful reference tool for overseas investors. And a source of hilarious personal slams.

By Tony Zhu
A group of 61 Chinese IT entrepreneurs including current former Google and Microsoft executives led by Kai-fu Lee, chairman and CEO of Beijing-based incubator Innovation Works, has established the website Citronfraud.com, arguing that Citron’s modus operandi is select legal corporations with only minor or no issues as attack targets, and make false allegations that cannot be verified by its US readership.

In response, Citron founder Andrew Left said that criticisms leveled at himself by the group amounted to a “personal jihad.”

The petition signed by the 61 entrepreneurs was partly in reaction to Citron’s allegations of fraud by Chinese Internet firm Qihoo 360, and Qihoo 360 CEO Zhou Hongyi was among the signatories.

Microsoft, SAP and others accuse market analyst Citron of fraudulent practices
By Phil Muncaster

A group of 60 Chinese entrepreneurs, CEOs, investors and regional heads of global tech concerns including Microsoft and SAP has turned their collective fury on short seller Citron Research, arguing the firm is deceiving the market by finding fault in firms where there is none.

The group launched an astonishing attack on Citron and its founder Andrew Left in an open letter posted to a new blog titled, rather unambiguously, Citron’s Fraud.

Citron is an ‘investment analysis company’ owned by Mr. Andrew Left, a man with a long record of fraud, deceit, and unlawful behaviour. 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.

The group says that some negative reports on Chinese companies listed in the US have “helped cleanse the environment”, but the likes of Citron have “started targeting legitimate companies with either no problems or minimal problems”, and told bare-faced lies.

The signatories include Charles Wu, VP IBM Greater China, Hera Siu, president of SAP China, Zhang Ya-Qin, president of Microsoft Asia R&D, Wang Xiaochuan, CEO of search engine Sogou, and Zhou Hongyi, chairman of browser and security giant Qihoo 360.

Another key figure behind the campaign against Citron is Kai-Fu Lee, former head of Google operations in China, who has had run-ins with the short seller before when he slammed a Citron reportwhich was highly critical of Qihoo.

Interestingly, Anonymous Analytics, the research arm of the hacktivist group, recently also exposed what it claimed to be fraudulent activity at Qihoo.

For his part, Left hit back in a blog post, claiming that Lee has a vested interest in going after Citron.

“Kai-Fu Lee has raised $180 million from a group of investors led by none other than Qihoo 360! And none of this relationship has been disclosed in his postings about Citron Research or his postings defending Qihoo 360,” he wrote.

It should be noted, however, that Sohu CTO Wang Xiaochuan also signed the letter against Citron, even though his firm actually came out looking pretty good.

Long time China market watcher Bill Bishop has also questioned the quality of Citron’s analysis.

It’s certainly true that short sellers like Citron are an irritant. It’s also true that any inaccuracies in reports from firms like Citron may cease to be such a major problem if investors were granted greater access to financial data from private Chinese firms. ®

by Kathrin Hille

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://blogs.ft.com/beyond-brics/2012/09/05/short-selling-debate-china-tech-fights-back/#ixzz26GUSzJ00

Just a year ago, nobody was surprised when a US-listed Chinese company was being accused of fraud and lies. One after another, firms that had gone public through reverse mergers were accused by short-selling firms like Citron Research or Muddy Waters to have cooked the books or misled investors.

But now Andrew Left (pictured), the man behind Citron, is under fire himself. Some of the people often counted among the best and brightest in China’s technology industry are ganging up against him, warning of “fraudulent analysts” and urging investors not to listen to him.

“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,” the group of five dozen executives from technology companies, venture capital funds and startups said in an open letter on Monday.

Left, in an interview with beyondbrics, denied all the claims made against him.

On a dedicated website, the Chinese group pledges to host an “on going fight against fraud”.

The list of signatories includes foreign company executives such as Zhang Ya-Qin, the president of Microsoft’s R&D in Asia, and Charles Wu, an IBM Greater China vice president. But one-third of the names on the list are those of venture capitalists and other people who finance Chinese tech start-ups. The push is led by Kai-fu Lee, the former Google China head who now runs Innovation Works, a start-up incubator, and the country’s most prominent tech insiders.

He got the ball rolling a week ago when he ridiculed Citron for a recent report, claiming that the short-seller lacked the most basic understanding of the business of Sohu, one company it was discussing. Left, Lee showed, had mixed up Sohu’s search product, its browser and its Chinese-language text entry tool.

Left said that Lee’s rebuttal was “a strawman. I gave a complete sum-of-the-parts analysis. It was irrelevant to the whole body of work.”

Their initiative against the short-sellers is not surprising. Left’s business model of shooting down many US-listed companies which are Chinese has added to an already challenging environment for fostering fledgling Chinese tech firms.

But the counter-attack is more than just an industry hurting. Things have become a little more challenging for the short-sellers in targeting Chinese companies for a while.

Evergrande, one of China’s largest real estate companies, has aggressively rebutted attacks by Citron and Muddy Waters, another short-seller. Left’s attacks on Qihoo, in particular, have been less than successful. Ever since he started targeting the company late last year, he has been criticised for errors and carelessness in his reports. The company itself has fought back vigorously, and its shares, trading at US$18 at the time of Left’s first report, rather than falling to his target price of US$5, closed at US$22.39 last Friday.

It remains to be seen if the initiative will gain wider traction.

On Tuesday, the new website ran Lee’s fourth open letter to Citron, in which he accused the firm of getting the facts wrong yet again on several counts concerning himself and his fund.

“Citron’s mudslinging on individuals is as unprofessional and false as their mudslinging on companies. Also this reminds them they should answer our questions, rather than bring up irrelevant and wrong information about Dr. Lee,” he wrote.

Left has published another blog post on the debate, and said that “there is a process: these are US-listed companies, so call the SEC, or sue me, I’m a US citizen… I think the reports are accurate. You can always find things to criticise or call careless. You can’t deny my track record.”

Additional reporting by Rob Minto