5 Chinese Stocks with Fraud Rumors Hitting New Lows

People like Bernie Madoff and Jeff Skilling are apparently not unique to the U.S. China has its fair share of financial liars and scammers as well. While most companies do their best to maximize their shareholders' equity in an honest manner, a few optimize return on equity by cutting the corners. Here are a few stocks that have not been performing well ever since rumors of fraud have come up. 1) Duoyuan Global Water DGW
This is a water treatment equipment supplier that's been publicly traded for a little over two years. In early April of 2011, allegations of securities fraud brought on by Levi & Korsinsky started to circulate. Specifically, the law firm had reason to believe that the company was creating materially inaccurate financial statements. Since the rumors, the stock has been trading near all-time lows. On July 22, Duoyuan Global announced that it would have to postpone its SEC filings for another month, lending more credence to rumors of falsification. Keep an eye out on this company's news, it could very well present an interesting short opportunity. 2) Yongye International YONG
This company researches, manufactures, and sells compounds for the agricultural industry, and has been public for nearly two years. Talk of earnings manipulation began to to circulate in mid-May, and the stock price has since been volatile. At this time, Absaroka Capital initiated coverage and set a $1 price target following the analyst's research. The research analyst's findings implicated the company in lying to customers that its flagship product was developed at Stanford University. Next, two separate merger considerations appeared to be attempts to secure illicit financing to further manipulate earnings. Lastly, the company's relationship to its two largest suppliers do not appear to be as professional as they should be. Like Absaroka's analyst, you may want to further analyze Yongye to see if shorting is appropriate. 3) China New Borun Corp BORN
The company is a corn alcohol manufacturer that has been trading publicly for a little over a year now. Like several of its counterparts, New Borun is facing questions concerning the fidelity of its financial reports. The firm claims to be reaping unusually high profits, despite the large amount of competitors. Citron Research also claimed in November 2010 that New Borun is holding several hundred million dollars in debt, which would offset all of its retained earnings. China New Borun Corp is trading at all-time lows today, but still has room to drop if the alleged debt problems are ever confirmed. Likewise, if the research firm is correct and New Borun has been toying with the top line's numbers, the markets may react very negatively. This situation presents a very interesting opportunity for those looking to short a mid-cap company. 4) China Agritech CAGC
China Agritech is a company that manufactures and distributes fertilizers. Based on investigations by LM Research, the company is fraudulent and may be a "pump and dump" scheme. One red flag is that its current CFO used to manage two companies previously which also failed, while he received millions in salaries and bonuses. Secondly, the companies claim to have partnerships with large agricultural businesses in China, all of whom have denied any involvement or business transactions with China Agritech. Lastly, physical investigations were undertaken to see what the company actually does, including attempts to find the company's products in stores as well as visiting its plants to find no production materials. The stock is trading near all-time lows, and investors will have to seriously consider whether holding on to it is in their best interests. 5) ChinaCast Education Corp CAST
is a for-profit post secondary educational services provider, and has been trading publicly for over 7 years. In mid-February of 2011, rumors started circulating of possible fraud at the company. The sources also claimed that the company's leadership was trying to suppress investigations by equity research firms. Currently, the stock is trading at its lowest levels in over 2 years. Historically, the stock chart has technical support levels between $4.30-$4.50. If selling pressure continues, the stock may see significant downside below $4.30, as investors' belief in the stock subsides. The rumors have not been very specific, so more research will have to be done to see what exactly this company is being accused of. This article may include mentions of rumors, chatter, or unconfirmed information. Readers should beware that while unconfirmed information may be correlated with increased volatility in securities, price movements based on unofficial information may change quickly based on increased speculation, clarification, or release of official news. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.