Role of Fraud Investigator in the rise of the short seller attacks - Union Registrars
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Role of Fraud Investigator in the rise of the short seller attacks Union Registrars 30 April 2021
Speakers
Juvenia Ho
Partner, Deloitte Forensic | Financial Advisory
Juvenia has over 20 years of experience specializing in forensic accounting, fraud
investigations, litigation support and fraud risk compliance review throughout Greater
China. She has vast experience in investigating with Chinese companies listed in Hong Kong
and overseas, including internal corporate investigations related to allegations made by
short sellers, internal control review, financial due diligence and restructuring.
Her extensive forensic accounting experience includes investigation into white collar crime,
corruption particularly in the context of Foreign Corrupt Practices Act and money
laundering, asset tracing inquiries, bribery & corruption risk assessments.
Royce Tsang
Manager, Deloitte Forensic | Financial Advisory
Royce has extensive experience in areas including fraud and corruption investigations,
litigation support, FCPA Compliance, Export Compliance, policy and procedures review,
compliance and internal control reviews.
Royce has also been on secondment in the Enforcement Division of the Securities and
Futures Commission, focusing on tackling misconduct by listed companies and their
directors who abuse their positions and shareholders' funds.
© 2021. For information, contact Deloitte China. 2
Contents
1. How does the Short-seller Operate? P. 3
2. The Recent Short Sellers’ Attacks P. 6
3. The Luckin Coffee’s Scandal P. 9
4. The JOYY’s Short-seller Attack P. 16
5. Consequences of the Recent Attack P. 20
© 2021. For information, contact Deloitte China. 3
How does short sellers operate?
Short seller Short seller sells
Naked Shorting
borrows 10 shares 10 shares of ABC
of ABC stock stock for $500 Role as Fraud Detectors
1 2
Stock Short sellers will
3 loses proactively public negative
5 4 value information to make the
Broker Short Seller Market stock price drop.
Short seller Short seller buys
returns 10 shares 10 shares of ABC
of ABC stock and stock for $400
keeps $100 How do short sellers locate
their target?
Unusually high growth Company with
in profitability and poor internal
receivables control
Compare financial Board
indicators with Independence
industry or company’s (e.g. CEO same
© 2021. For information, contact Deloitte China.
past result as Chairman) 4
Who are the Short-sellers?
Abusive trading
Fraud detector strategies
Identify overpriced stocks Damper investor
& confidence
business misconduct
Improve market efficiency Decrease market liquidity
© 2021. For information, contact Deloitte China. 5
Impact of Short Sellers’ Attacks
Immediate Impact
91% 85% 47%
496.HK 6863.HK 1548.HK
22% 14% 10%
0400.HK IQ 1378.HK
Long Term Impact
Reaches million
investors at Short With little
anytime attacks accountability
anywhere
© 2021. For information, contact Deloitte China. 6
The Recent Short Sellers’ Attacks
Hong Kong
Date Code Company Short-seller Market value right before
short-seller attack
29-Jan 1177 Sino Biopharmaceutical (中國生物製藥) GMT Research HKD 144bn
6-Feb 867 China Medical (康哲藥業) Blue Orca Capital HKD 25bn
26-Feb 992 Lenovo (聯想集團) Bucephalus Research HKD 65bn
3-Mar 3883 China Aoyuan (中國奧園) Anonymous HKD 29bn
17-May 1636 China Metal Resources Utilization（中國金屬利用） Hindenburg Research HKD 9.5bn
27-May 819 TIANNENG POWER INTERNATIONAL(天能動力） Cloudy Thunder Research HKD 10.4bn
22-Sep 1179 HUAZHU GROUP LTD（華住集團-S） Bonitas Research HKD 100bn
12-Nov 3826 China Harmony Auto Holding Ltd（和諧汽車） Bonitas Research HKD 5.3bn
© 2021. For information, contact Deloitte China. 7
The Recent Short Sellers’ Attacks
United States
Date Code Company Short-seller Market value right
before short-seller
attack
31-Jan LK Luckin Coffee (瑞幸咖啡) Muddy Waters Research USD 9bn
5-Feb LK Luckin Coffee (瑞幸咖啡) Ash IIIuminations Research USD 9bn
13-Feb WUBA 58.com (58同城) Grizzly Research USD 9bn
20-Feb CAN Canaan (嘉楠耘智) Marcus Aurelius Value USD 0.9bn
24-Feb GSX GSX Techedu (跟誰學) Grizzly Research USD 10bn
4-Mar JKS JinkoSolar (晶科能源) Bonitas Research USD 1bn
7-Apr IQ iQIYI (愛奇藝) Wolfpack USD 12bn
10-Apr GDS GDS Holdings (萬國數據) J Capital USD 8bn
14-Apr GSX GSX Techedu (跟誰學) Citron Research USD 7bn
7-May GSX GSX Techedu (跟誰學) Scorpio VC USD 10bn
18-May GSX GSX Techedu (跟誰學) Muddy Waters Research USD 8bn
© 2021. For information, contact Deloitte China. 8
The Recent Short Sellers’ Attacks
United States
Date Code Company Short-seller Market value right before
short-seller attack
25-Jun SSC Ideanomics Inc.（優點互動） J-Capital Research N/A
25-Aug LX LX（樂信） Grizzly Research USD 1.5bn
22-Sep HTHT HUAZHU GROUP LTD（華住） Bonitas Research USD 13bn
22-Oct SPI SPI ENERGY CO., LTD（陽光動力） Grizzly Research USD 0.2bn
18-Nov YY JOYY Inc.（歡聚） Muddy Waters Research USD 8bn
30-Nov KNDI KANDI TECHNOLOGIES（康迪車業） Hindenburg Research USD 1bn
18-Dec CBAT CBAK ENERGY TECHNOLOGY, INC（中比能源） J-Capital Research USD 0.4bn
14-Jan DOYU DOUYU INTERNATIONAL HOLDINGS LTD（鬥魚）Grizzly Research USD 3.9bn
16-Feb EH EHANG HOLDINGS, LTD.（億航智能） Wolfpack Research USD 5.8bn
26-Feb SOS SOS（艾斯歐艾斯） Culper Research USD 1bn
6-Apr EBON Ebang International Holdings Inc.(億邦國際) Hindenburg Research USD 1.2bn
© 2021. For information, contact Deloitte China. 9
Luckin Coffee’s Scandal
Coffee Shop Leader in China
Over 4,500 stores in China
Rely on electric payments
Established in
October 2017 Listed in NASDAQ in May 2019
Burn cash for market share
© 2021. For information, contact Deloitte China. 10Luckin Coffee’s Attacking Timeline
31 Jan 2020 5 Feb 2020
1 Feb 2020
45
2 Apr 2020
40
Long position
29 Apr 2020
Admit fraud
Share Price (USD)
35
30
25
27 Apr 2020
20 15 May 2020
15
10
5
0
30-Jan 6-Feb 13-Feb 20-Feb 27-Feb 5-Mar 12-Mar 19-Mar 26-Mar 2-Apr 9-Apr 16-Apr 23-Apr 30-Apr 7-May 14-May 21-May 28-May
Date
© 2021. For information, contact Deloitte China. 11Luckin Coffee’s Scandal
1 Number of items per store per day inflated
92 Full-time 11,260 hours 620 Stores 100% Operating
1,418 Part-time of Video Hours
Site Visit
Q3 2019 69%
Revenue
Q4 2019 88%
Revenue
SEC Filings Site Visits
271, 272, 273, 274, 275, 276 …
271, 273, 274, 277, 279 …
Discreet Enquiry
© 2021. For information, contact Deloitte China. 12Luckin Coffee’s Scandal
2 “Items per order” in a downward trend
10,119 25,843 2,213 Stores 45 Cities
Customers Receipts
Receipt Analysis
© 2021. For information, contact Deloitte China. 13Luckin Coffee’s Scandal
3 “Net selling price” per item inflated
10,119 25,843 2,213 Stores 45 Cities
Customers Receipts
Receipt Analysis
Net Selling Price 12.3% Free Item
Per Item Distributed
Free Item
Net Selling Price
Distributed
Per Item
SEC Filings Receipts SEC Filings Receipts
© 2021. For information, contact Deloitte China. 14Luckin Coffee’s Scandal
4 Overstated Advertising Expenses
© 2021. For information, contact Deloitte China. 15Luckin Coffee’s Scandal
5 Inflated Revenue from “Other Products”
10,119 25,843 2,213 Stores 45 Cities
Customers Receipts
Receipt Analysis
Other Products
21.7%
Other Products
3Q19
6.2%
4Q19
SEC Filings Receipts
© 2021. For information, contact Deloitte China. 16JOYY’s Short-seller Attack
Leading social media platform in China
485.2millions MAU in 19Q4
USD3.6 Billions M&A deal
Established in April 2005 Listed in NASDAQ in Nov 2012
Over 4 major brands
© 2021. For information, contact Deloitte China. 17JOYY’s Short-seller Attack
16 Nov 2020 25 Mar 2021
160
Independent
Review Conclusion
8 Feb 2021 on BIGO
140 Independent
Review
18 Nov 2020 Conclusion on YY
120
Share Price (USD)
100
80
60
40
20
0
Date
© 2021. For information, contact Deloitte China. 18JOYY’s Short-seller Attack
Researched YY for over an year
Analyzed 115.6 million transactions + 1.2 millions users +
20,000 performers
Marco data analytics + traditional forensic techniques
© 2021. For information, contact Deloitte China. 19JOYY’s Short-seller Attack
• Internet VS Traditional industries
Too much assumption used
Well known accounting & law firms participated
Baidu conducted comprehensive DD before M&A
© 2021. For information, contact Deloitte China. 20Bill Approved by the U.S. Senate
18 Dec
2020
The Holding Foreign Companies Accountable Act
02
Fail to comply
for 3 years
Retain Auditors whose foreign offices are fully
subject to inspection by PCAOB
Fail to comply
Additional Disclosure
1. Foreign governmental entities owned?
2. Board members are Chinese Communist Party?
Violation of China
?
?? State Secrecy Law?
© 2021. For information, contact Deloitte China. 21New NASDAQ Listing Amendment Submitted
20 May
2020
Amended NASDAQ Listing Rule
02
1. Raise USD25mm in IPO OR
2. >25% post-listing market capitalization
PRC Companies listed on Nasdaq Will no. of PRC
since 2000 (Up to 20 May 2020)
Companies to be listed
40 on Nasdaq drop?
?
>USD 25mm
??Impacts
USD 3.88 bn
USD 3.13 bn
USD 1 bn USD 3.07 bn
USD 1-2 bn
USD 2 bn
© 2021. For information, contact Deloitte China. 23Impacts
Secondary Listing
Targets PRC companies
PRC giants abandon
listing in the U.S.
Targets tech firms
HK IPO Short-sellers
Market Attacks
© 2021. For information, contact Deloitte China. 24What is the value of forensic accountant in forensic investigation?
Companies have fraud issues
Clean Companies
REBUILD TRUST Provide facts to
VIA investors
FORENSIC
INVESTIGATION
Quantify fraud
exposure
© 2021. For information, contact Deloitte China. 25Thank
you
© 2021. For information, contact Deloitte China. 26About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organization”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 330,000 people make an impact that matters at www.deloitte.com. Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei and Tokyo. The Deloitte brand entered the China market in 1917 with the opening of an office in Shanghai. Today, Deloitte China delivers a comprehensive range of audit & assurance, consulting, financial advisory, risk advisory and tax services to local, multinational and growth enterprise clients in China. Deloitte China has also made—and continues to make—substantial contributions to the development of China's accounting standards, taxation system and professional expertise. Deloitte China is a locally incorporated professional services organization, owned by its partners in China. To learn more about how Deloitte makes an Impact that Matters in China, please connect with our social media platforms at www2.deloitte.com\cn\en\social-media. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities. © 2021. For information, contact Deloitte China.
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