KGJI: A 'Fraud School' Success Story
Muddy Waters, a research firm that has exposed many Chinese frauds, authored a White Paper on the organized network that brought numerous fraudulent companies onto U.S. exchanges. The presentation and research paper, Frauducation, cited a 2012 Chinese Today's Fortune article that discussed an investigation into a Chinese "fraud school." The article (translated into english) describes a "systematically criminal" platform:
... the "fraud school" is a small investment bank and financing counseling company. It uses a network of accounting firms and law firms based in HK and US to jointly operate to present "trash" enterprises as fast-growing and huge-profitmaking super stars, thus catching the foreign investors' eyes, gaining private funding, and subsequently going public in the US....After that, they will keep coaching the firm on producing falsified reporting documents in order to make it keep "growing" with the eventual goal of listing on a primary exchange (i.e. NYSE or NASDAQ) and collect even more money from US investors.
While the investment bank leading the fraud school was not specifically named in the article, the research paper highlighted the likelihood of it being a Hong Kong outfit named Chief Capital.
The Frauducation white paper also examined the audit firm of Jimmy C.H. Cheung & Company. Cheung was the earliest auditor of record for RINO and audited ChinaCast (OTCPK:CAST) which, according the SEC, was a "massive" fraud. We discovered that Cheung also performed audit work for Kingold.
The article further details alleged irregularities regarding Kingold. The share of Kingold went down from 2.00 to about 1.30, but recovered to 1.60 on Friday.
A video by Muddy Waters about the alleged Chinese fraud school can be found here.
I am not aware if any Bursa or SGX listed company went to this alleged fraud school. But the audit firm of Jimmy C.H. Cheung & Company (featured in the above video) did auditing work for a SGX listed company.
The firm is called International Healthway Corp (IHC), from it's IPO offer document (dated 1 July 2013)
And it seems that nothing has changed, the same auditor is still auditing the subsidiaries in Hong Kong according the the latest anual report. That looks like a red flag.
But there are many more red flags. Investor Central in an article named "International Healthway Corporation Limited - Do the directors really live in the Thye Hong industrial building in Leng Kee?" came up with "29 questions that need to be asked".
And according to this article the authorities are also looking at trading of IHCs shares.
Even in the boardroom there seems to be problems.
The auditor of IHC (PricewaterhouseCoopers) issued a "disclaimer of opinion" in the 2015 annual report: