Citron Research short seller Andrew Left on Evergrande debt crisis
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Andrew Left, founder and CEO of Citron Research
Adam Jeffery | CNBC
Andrew Left, an American short-seller banned from trading in Hong Kong for a damning report he wrote on Evergrande years ago, says the Chinese property developer’s debt crisis was “a long time coming.”
He told CNBC that he does not believe Evergrande is a problem for China.
“The Evergrande situation was a long time coming and China needed to rid this from their system. Left stated in an email to CNBC that this was not a Lehman moment, and it is not systemic.
He was referring to the collapse of Lehman Brothers in 2008 — the world’s fourth-largest investment bank at that time, which filed the largest corporate bankruptcy in U.S. history. This bankruptcy spread to other banks and triggered the financial crisis.
Left, the founder of Citron Research, was banned from trading in the Hong Kong markets after he published a 2012 report predicting that Evergrande would soon be insolvent.
His five-year ban ends next month.
Left stated in an email interview to CNBC that “Everything I talked about from leverage to corporate Governance turned out to have been true. But instead of looking at my report, the SFC…forced me to spend millions fighting for myself.”
He was referring to Hong Kong’s Securities and Futures Commission (SFC), which alleged that Left published a report with “false and misleading” information on Evergrande, including his accusation at the time that the property developer was engaging in accounting fraud.
Following the SFC’s allegations, Hong Kong’s Market Misconduct Tribunal concluded that Left was guilty. This tribunal, which is independent of the SFC, investigates cases of market misconduct including insider trading or stock market manipulation.
China seems to have a strategy for resolving this. It might not be pretty but it is a long time coming and they will save the system from the bottom up.
Andrew Left
founder of Citron Research
Left’s accusations — that Evergrande was insolvent and committing accounting fraud — appear to have never been proven. The tribunal in 2015 rejected his application to produce records and documents from Evergrande.
CNBC reached out to Evergrande but she was unavailable for comment. CNBC reached Hong Kong Securities and Futures Commission to request comment.
The escalating crisis at Evergrande — the world’s most indebted developer, with liabilities of $300 billion —roiled global markets this week. China’s number two developer in terms of sales, the firm has an extensive presence in China and is involved in a variety industries including real estate and electric cars and health-care service.
Evergrande has said it may default on its debt, with one large interest payment of $83 million due on Thursday. Analysts have also warned The company will most likely default. An investor watch is on the rise amid concerns of contagion spreading to other markets.
Left stated that Evergrande was correct when he published his 52-page report in 2012. The investment strategy of short-selling involves borrowing shares and selling them to make money.
“10 years ago, I wrote how the company is playing fast and loose with debt and using aggressive accounting to masquerade its true financial health. I continued to say how the company’s pet projects are costing billions in all off balance sheet financing,” Left said.
Everything I said has now been proven true. The Chinese are currently suffering. Left stated that this shows how important freedom of speech is and the need to avoid short-selling in markets.
In recent weeks, angry Chinese investors protested and demanded their money back. Overseas investors, which include major asset managers globally, are waiting to see if Evergrande will be able to pay out two interest payments due Thursday and next week.
‘China has a plan’
The crisis will wipe out the company’s stock, Left predicted.
He stated that Evergrande’s equity was worthless and the bonds were questionable. Evergrande shares fell more than 80% in the past year, while yields on its bonds increased. Bond yields and prices move in opposite directions — the higher the yield, the lower the bond’s price.
Even though the Chinese developer is in serious trouble, Left said the impact will be limited.
“Chinese banks will take a manageable hit and the people will have a landing helped by the government,” he said. “I do believe this is not systemic and will not affect future investments in China or Hong Kong. The tech sector regulation I believe is much scarier than that.
China is able to unravel this. It might not be pretty but it is a long time coming and they will save the system from the bottom up,” he added.
Left’s rebuttals to Hong Kong regulators’ ruling
Left was banned from trading in Hong Kong’s stock markets in 2016, after the city’s Market Misconduct Tribunal found him guilty of market misconduct in relation to the Evergrande report.
He was also required to pay back 1.6 million Hong Kong Dollars ($205,000), which he earned from selling the stock short.
Here’s what Hong Kong regulators alleged he did — and his rebuttal to each point.
1. Market misconduct
Regulators accused Left of market misconduct in publishing the report. The report stated that Evergrande was bankrupt and had defrauded investor. Left’s statements were misled and false, according to the tribunal.
Left claimed that the report said Evergrande was either insolvent soon or is imminent because the company’s liquidity could not handle the debt load and other off-balance sheets activities.
“I backed it up with pictures and testimonials from protests nationwide. It was absurd. “I think that we can see it now,” he stated, in reference to the current liquidity crisis.
“Now look who is paying the price — the poor employees and people who trusted Evergrande with deposits,” he said.
2. Lack of knowledge about local accounting practices
Regulators said Left had little knowledge of local accounting standards and financial reporting, and that he failed to check with experts or the firm to verify information he received.
Left says he was following GAAP standards. This is a set of common principles and standards that are issued by the U.S. Financial Accounting Standards Board.
“The fact that I was using GAAP standards and not Hong Kong accounting [standards] on a few data points does not nullify the tone or the message of the report,” he said.
CNBC was told by him that he could not question Evergrande or its chief financial officer.
“I had a trial where I was not even allowed to question the company. He said that it was “too one-sided.”
3. Negligence
The tribunal accused Left of being negligent in publishing the report.
Left maintained that he wasn’t negligent. “And if I was, are they going to bring charges against every investment bank who has a $30 target on the stock who have generated huge banking fees while not looking at the obvious?” He asked the question in an email. He replied, “That’s negligent.”
Evergrande’s stock stood at 2.58 Hong Kong Dollars ($0.33) Thursday morning. It had dropped more than 80 percent year-to-date.
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