'China Hustle' Documentary Claims Chinese Companies Are Deceiving American Investors

In March, a new documentary from the producers of “Enron: The Smartest Guys In The Room” claims it will shed some light on one of the largest financial frauds in the world.

Jed Rothstein, director of “The China Hustle” has said hundreds of Chinese companies listed on U.S. stock exchanges are inflating their financial numbers.

Global Threat

“The China Hustle” debuted at the Toronto International Film Festival back in September. According to a review by Variety, the film suggests Chinese companies who list in the U.S. via a process called reverse merger are endangering U.S. pensions, investment funds and even the entire financial system.

The film relies heavily on interviews with short sellers and explores two smaller companies that the filmmakers allege are deceiving U.S. investors by taking advantage of lax Chinese regulations. The film details how auditors, lawyers and dealers in both the U.S. and China are complicit in the deception.

Targeting Alibaba

The film reportedly turns its focus to Alibaba Group Holding Ltd. BABA in its closing minutes, but executive producer Alex Gibney has been clear that the filmmakers are not making any specific allegations against Alibaba.

“I’m not saying Alibaba is a fraud,” Gibney said in an interview. “I think the reason [the Alibaba segment] was included was more of a Muddy Waters-type warning for where we need more research”

The film features notorious short sellers, including Dan David and Jim Chanos. Chanos said in September that he closed a short position in Alibaba back in January.

Alibaba has been intensely scrutinized by activist investors for its accounting methods since going public in 2014. Pressure from U.S. investors has lead to the company switching to GAAP accounting methods and de-emphasizing reliance on controversial metrics, such as gross merchandise volume.

Bearish Bets

Despite the company’s efforts to increase transparency, traders remain skeptical. As of Nov. 15, Alibaba was the single most heavily shorted stock in the world, with an open short position of $23.1 billion, according to financial analytics firm S3 Partners.

Alibaba stock has doubled in 2017 and has outperformed each of U.S. FANG stocks.

“The China Hustle” is expected to premier in theaters and on demand starting on March 30, 2018.

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Disclosure: the author is long BABA.