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Radio silence at China Expert Technology (CXTIE.OB)
Topics: UncategorizedOnly months ago, I thought that China Expert Technology: CXTIE.OB had bright prospects. The Chinese e-government service provider had announced a series of large contracts and appeared poised for a profitable year. After CFO Simon Fu resigned, shares took a huge tumble. Sensing a bargain, I dipped my toe in the water. I was encouraged initially by CEO Huang (Michael) Tao’s press conference, which appeared to be forthcoming. That was then.
Now Tao and the rest of the CXTI gang have ceased communications with the investor community and are delinquent in their SEC filings. They had to promote an insider to the CFO position, perhaps an indication that no qualified outside candidate would accept. Major holder JLF Asset Management has slashed its holdings.
I know from your emails that many of you view this as an asymmetrical bet. Here’s your hypothesis: at current prices, it can only go down $0.68, but any good news or even a cessation of selling could lift shares much more than that. I agree, but here’s the rub: as time goes on it becomes less and less likely that this turns out well.
A few random thoughts to consider:
- History rhymes. Yes, I realize that approximately two years ago, CXTI plunged to well under $1, only to recover and eventually move to fresh highs. But there are critical differences. That drop only lasted a few days and did not have nearly the volume of this one. Moreover, the prior drop in my view was caused by the overhang of a toxic convertible offering. This one is a different animal, propelled by fears that the entire company could be a hoax.
- JLF, JLF, JLF. Many readers believe that this was prompted by a margin call at major holder JLF Asset Management. After a little research, this theory appears to be wishful thinking. Last week, JLF had around 4.5M shares. At $2, that is less than a $10M position for a fund with holdings last reported at $674M. Other theories posit that JLF learned inside information from former CFO Simon Fu, who has since taken a position with HollySys (to be acquired by another JLF holding, Chardan North China Acquisition Corp. ). I have my doubts. Selling on inside information would obviously expose JLF to enormous legal liability. At the same time, I don’t think that JLF would allow Fu to take the helm at HollySys if it believed that he operated a hoax on them. JLF now owns exactly 5% of outstanding CXTI shares, after selling over 2.6M shares on 9/10/07.
- The Contracts. Blogger Cabeza Howe, who is fluent in Mandarin and appears to be very balanced in his views, was unable to confirm the existence of any of five contracts he investigated. Note that most of these contracts are attached to SEC filings. Is it possible that they were made up out of whole cloth?
- BDO McCabe Lo. CXTI’s auditor that signed off on the last 10-K was the asian arm of respected BDO Seidman. The 3rd Standard for Field Work under Generally Accepted Auditing Standards (GAAS) requires auditors to confirm the reliability of financials with “sufficient competent evidential matter” to be obtained through “inspection, observation, inquiries and confirmation.” It seems to this layman that BDO would have had to confirm at least some of the contracts and operations, but I have no idea whether or not this occurred.
- The Website. http://tech.chinaexpertnet.com. Its a joke, which would be a problem in any case but is worse here because CXTI is supposed to be a technology services company. Also, IR company Hayden Communications resigned due to its inability to communicate with the company.
All of these facts point to two possible scenarios: (1) the company and contracts really exist but the company has decided to cease communications with investors, perhaps to conceal fraud raised when Fu resigned, or (2) the whole thing was a hoax. The only certainties are that CXTI will not go lower than zero, and that it will soon be trading on the pink sheets. A bounce is likely here, but a return to its prior trading range is not.
DISCLOSURE: Long CXTIE.OB (a small but regrettable position).
I think the regulators should take action and stenghten the rules regarding foreign small caps companies listed over US equity marquets, or every smart scam artists of the world will continue to come up with their own fairy tales and lure investors money into their offshore bank accounts.
Sometimes i wonder what’s the use of an administration like the SEC, seems it has became, or it is so pointless for scammers to stop them thinking about how to steal money from investors pockets.
But one thing is clear by the way, the main task for the SEC isn’t to protect investors, but to protect the markets only.
if CXTI(e).ob turns out to be a total lie, then I will never ever invest a single penny i Chinese Stocks at Pinks or OTCBB – any more.
My confidence in Chinese companies listed at the smaller US markets will be zero in the future, if you after this “show” will end up with a stock worth zero.
Other Chinese companies will suffer, due to this “show” that the management of China Expert Technology, how will the investors ever trust small cap companies like this in future. let’s see what is going to happen, but the odd are very very dark.
In response to the previous comment about other Chinese companies suffering due to lack of trust, look at CHCG. CHCG is an example. The good news is rather than ignoring the situation, they have at least issued a statement that they are going to clarify their 8K regarding restructuring, and what they own exactly, which I think left too many questions and speculations to run amuck. The bad news they waited for the stock to drop all the way to 2.70 before bothering to say they would clarify. Was there an overreaction? Probably, but it’s because of stories like CXTI on everyone’s mind.
I am long on CHCG unfortunately, but I think the org of how the subsidiaries are controlled really wasn’t a big deal, but with preferred holders dumping left and right in the last month and a half, it makes you wonder who gets to know what and when. Anyhow, the stock will probably make its way back to the mid 4s next week after they clarify things. It’s performing fine fundamentally, and deserves to be much higher than it is, but trust is just as important as fundamentals, and I think CHCG will have a hard time getting back much higher than the 4s until there can be some trust in these companies.
I know CHCG has to be somewhat legit, as you can’t make up physical stores, but I guess you can make up sales numbers, etc., and what you really own or don’t own. I don’t know if they are doing that, but it makes you wonder. They could end up being the next CXTI if they keep screwing up in communicating.
Why are there no law suits here. It seems obvious that there is fraud, and that managers lied to investors. They should be held responsible. The auditors should also be held responsible, as that is what they get paid for, to find out the truth.
I understand that there are numerous law suits agains Chinese equipment manufacturer under far less suspicious circumstances. Here, the whole company appears to be a fraud, or that it is cheaper to fold the company than admit what went wrong.
Legal opinions, please?