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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Again, Citron chose to continue to evade Dr. Lee’s questions and criticism on their erroneous report and, under attack by the 61 business leaders for fraud, put together an attack on Dr. Kai-Fu Lee today. They had four main points, and here are Dr. Lee’s responses:
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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)
by Kai-Fu Lee
Recently, several “China Short Sellers” have developed a scheme to make themselves rich. First, short a US-listed China stock. Then, write a negative report on that company. After the stock drops, cover the short, and pocket a huge profit. This practice itself is already questionable, but what is despicable is how these short sellers take advantage of the information asymmetry between China and the US, and write reports full of holes and lies, knowing that their American readers have no way of verifying them. This paper dissects one such example, Short Seller Citron Research’s report “Qihoo’s entry into search puts SOHU in play” (August 24). This paper will show that Citron lacks even the most basic understanding of the Chinese Internet/Search market, yet it fabricates and distorts information to deceive investors. It is not my intention to support or challenge Citron’s recommendations, but only to expose Citron’s ignorance and deception, and raise the question whether any investor should ever trust them.
Citron lacks basic understanding of search
The most ludicrous part of Citron’s report is its faulty analysis of search engines and basic misunderstanding search engine Sogou’s strategy and products.
First, some background for those unfamiliar with the Chinese market:
- Sogou is a company majority owned by Sohu, and produces three products:
- Sogou.com search, comparable to Google.com search.
- Sogou browser, comparable to IE or Chrome browser.
- Sogou Pinyin IME (input method editor). An IME is a “soft keyboard” that converts typed roman character input (like “beijing”) into Chinese characters (like “北京”). IMEs are installed in Windows/Mac and are general purpose text-entry tools (not just for search).
- Sogou IME is the leading IME in China, with about 74% penetration.
- Sogou browser is an emerging browser that has increased its user penetration from 5% in 2010 to over 20% recently.
- Sogou search has had about 1% market share until Sogou Browser became successful. As Sogou Browser increased its penetration to over 20%, Sogou search also increased its share to 3-4.5%.
- Browser market share can increase search market share, because many Chinese users have a habit of searching from the browser directly. Only about half of the search queries are entered on a search engine’s webpage.
- Pinyin IME is a software product basically detached from search, and has no direct relationship with search engines. (Note that a few IMEs including Sogou have experimented with a feature to encourage users to search directly from the IME, with disappointing results, as it is not natural.) Empirically, search market share and IME market share can be shown to be virtually uncorrelated.
The above points are validated by the following table, showing search market share (from iResearch), as well as Sogou Pinyin and Sogou Browser market penetration (from Sohu):
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The Dark Side of Andrew Left
Citron Research is a one-man show run by Mr. Andrew Left, whose fraudulent career began with a huge black mark. In 1998, in his first job, Mr. Left was found by the National Futures Association to have: “MADE FALSE AND MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). ” Mr. Left was debarred for three years, among other punishments. This finding can be found on the website of the National Futures Association.
After being debarred, Mr. Left was employed as the President & CEO of Detour Media in 1999. But in February 2002, his company sued him for stealing six checks worth about $25,000. In Detour Media’s official SEC filing, the company alleged Mr. Left’s “fraud and deceit, negligent misrepresentation, breach of fiduciary duty and unlawful monetary conversion.” This legal paperwork, as well as the final judgment (Mr. Left had to pay $26,445.22) can be found on Court orders Mr. Left to pay $26,445.62 for lawsuit (fraud and deceit).
In 2005, Mr. Left founded www.stocklemon.com, a predecessor to www.citronresearch.com. On this website, he slammed a company called WHIS, and one of WHIS’s principals, Mr. Salim Rana. He fabricated information about Mr. Rana (calling him a thief who steal from the elderly), and Mr. Rana sued Mr. Left for libel. Mr. Left failed to comply with the court’s order for discovery. As a result, the court issued a judgment, ordering Mr. Left to pay Mr. Rana $2,500,000 for damages. The documents can be found here: Court orders Mr. Left to pay $2,500,805.64 for lawsuit (libel)
In 2010, Mr. Left again ran into trouble with the law, in an altercation with a businessman. He was arrested in Florida. In addition, the records show that he was charged for “failing to appear.” His arrest record, along with his mug shot, can be found here.
One has to wonder why an investor would trust the investment advice of someone with a record of fraud, deceit, and unlawful behavior.
Andrew Left’s company Citron provides investment advice, typically in the form of shorting stocks that Citron believes to be fraudulent or have “terminal business models.” Citron also invests its own money, and presumably makes its short trades before its readers do, and gets in at a better price than its readers.
Citron began shorting and attacking Chinese stocks in 2006, with a good record until mid-2011. This “golden period” was made possible by a wave of reverse mergers that took a number of fraudulent Chinese companies public. Citron and its customers made good profit from 2006 until 2011 by exposing these fraudulent companies. Read more of this article »