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Jeremy Hurewitz


           In 2011 the investigative team at the corporate security firm where I was working was hired by a New York-based hedge fund to do research on a Chinese mining company that had aroused their suspicions. Real Gold was listed on the Hong Kong exchange and the hedge fund theorized that they were exaggerating their gold output.

           Our team went through the corporate records and found an array of red flags. Suspicious subsidiary companies where money was being funneled, independent directors with questionable credentials, and an array of alarming accounting practices were uncovered.

           With suspicions validated we moved into phase two: on the ground investigative work. We hired a subcontractor to go visit the mines and the nearby village in a remote area of Inner Mongolia. What he found there was stunning.

           While one mine was busy producing gold, the other two were a sham: one was flooded with water and the other was seemingly abandoned. One memorable detail from our subcontractor was a photo he took of weeds growing out of the road to the other two mines. No weeds would be growing out of a road with heavy machinery coming in and out.

           That would have been enough for our clients to act on, but there was more. Our subcontractor went to the local village and when he asked about the two non-functioning mines, he was told by the locals that some of them had been paid to act like they were busy working and were watched by a bunch of “foreigners in suits”. They had faked mining production for the investor’s road show!

           Our client was delighted. They shorted the stock and made a killing and Real Gold was suspended from the Hong Kong exchange.

            Real Gold was part of a wave of Chinese frauds exposed on public exchanges around that time. A mysterious research firm called Muddy Waters led the way with their shocking expose on Sino-Forest, a timber company based in China’s Yunnan province that exaggerated its timber resources. They paid the price of their lies by being delisted from the Toronto Stock Exchange and were the target of subsequent lawsuits.

           Our client put us on retainer after our success on Real Gold and we helped them short other Chinese companies. For a while it was like shooting fish in a barrel. Find a Chinese company and do a bit of research – if anything seemed suspicious, go deep quickly before others could trade on the information. If the company listed through a reverse merger – a backdoor to listing where a company can buy a defunct company’s public listing and bypass the diligence that comes with a standard IPO – then it was almost too easy.

           The Securities Exchange Commission delisted dozens of firms as a result. Many were shady penny stocks trading over the counter, but others were quite a bit more substantial. One moment they were fairly big, publicly traded companies and then suddenly they went dark and were never heard from again.

           China’s response was to crack down on transparency, not on the fraud itself. The Chinese government made it harder for investigative firms and journalists to get access to corporate records. They cracked down on investigators like our subcontractor, and intimidated those continuing with efforts to uncover fraudulent Chinese companies.

           If this is sounding familiar, it is the same playbook China has run more recently when it came to the Covid 19 virus of cracking down on whistleblowers instead of dealing with the problem. When SARS came roaring out of China’s wet markets officials employed a similar strategy with a temporary crackdown on the wet markets and intimidation tactics used on those trying to get to the truth. Experts predicted correctly that it was only a matter of time before another virus resurfaced out of these markets if they weren’t permanently shut down.  

           Just like another novel disease originating from China’s wet-markets, guess what has appeared again out of Chinese corporate culture? If you guessed fraud, you guessed right.

           In early 2020 a story broke about a Chinese coffee chain, Lukin Coffee, engaged in massive fraud. The company was founded only in 2017 but quickly grew to 4,500 locations in China and bragged that it would surpass Starbucks as the biggest chain in the country. Its Nasdaq listing in 2019 was one of the most successful of any Chinese company that year.

           But then word came out in April that it had faked approximately $310 million in transactions leading to its suspension and ultimately its delisting.

           Now comes the Holding Foreign Companies Accountable Act, passed at the end of last year, which offers a rare glimmer of bipartisan cooperation in our highly polarized political climate. The Bill stipulates broader U.S. oversight of accounting practices for all companies traded on domestic exchanges, which would increase the chances of catching the financial dodges that Chinese companies have engaged in and would offer greater protection for investors from fraud. It also stipulates that companies must certify that “they are not owned or controlled by a foreign government.” This is also tremendously important because Chinese companies are often controlled by well-connected Chinese officials or close proxies.

           Final amendments are now being added to the Holding Foreign Companies Accountable Act at the moment, providing more specific rules to promote transparency of ownership and the Chinese government’s role in companies that list on U.S. exchanges.  

           Recognizing China not as an enemy but as a strategic competitor is an important part of this a new era of China relations. Doing so can be a building block for politicians to come together to foster a more united approach against aggressive Chinese corporate espionage, which has allowed China to rapidly advance its industrial agenda, and fraud, which has cheated U.S. investors out of huge sums of money.

           Incidentally, Real Gold was quietly delisted from the Hong Kong exchange in April, 2020.


Jeremy Hurewitz was a journalist and security consultant for nearly two decades based in Prague, Shanghai and New York. He is currently the Curation Director for NationSwell.

Hurewitz will be leading a conversation with famed author Robert Kaplan and former US Ambassador Liliana Ayalde on 5/18, register HERE to join

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