Andrew Left, Founder and CEO of Citron Research
Adam Jeffery | The Washington City Times
Andrew Left, a US short-seller banned from trading in Hong Kong over a damning report he wrote on Evergrande years ago, says the Chinese real estate developer’s debt crisis was “a long time coming.”
But he told The Washington City Times he doesn’t think Evergrande’s situation points to a widespread problem for China.
“The Evergrande situation took a long time and China had to remove this from their system. This is not a Lehman moment and this is not systemic,” Left told The Washington City Times in an email.
He was referring to the collapse of Lehman Brothers in 2008 – at the time the fourth largest investment bank in the world, which filed for the largest corporate bankruptcy in US history. That bankruptcy spread to other banks and caused the global financial crisis.
Left, the founder of Citron Research, was banned from trading in Hong Kong’s markets after he published a 2012 report predicting Evergrande would soon be insolvent.
His five-year suspension ends next month.
In an email interview with The Washington City Times, Left said, “Everything I discussed, from leverage to corporate governance, turned out to be true, and instead of considering my report, the SFC … forced me to spend millions to make myself better.” to defend.”
He referred to Hong Kong’s Securities and Futures Commission (SFC), which claimed that the Left had published a report containing “false and misleading” information about Evergrande, including its accusation at the time that the property developer was engaged in accounting fraud.
Following the SFC’s allegations, the Hong Kong Market Misconduct Tribunal concluded that Left was guilty. The tribunal is an independent body that deals with cases of market misconduct, including insider trading and stock market manipulation.
The Left’s allegations – that Evergrande was insolvent and committed accounting fraud – never seem to have been proven. The tribunal in 2015 rejected his request to produce Evergrande records and documents.
Evergrande could not be reached for comment when The Washington City Times contacted him. The Washington City Times contacted the Hong Kong Securities and Futures Commission, which declined to comment on this report.
The escalating crisis at Evergrande – the world’s most indebted developer, with liabilities of $300 billion – raged in global markets this week. The company is the second largest developer in China by sales and has a huge presence in the country, operating in sectors ranging from real estate to electric vehicles and healthcare.
Evergrande has said it may default on its debt, with a large $83 million interest payment due Thursday. Analysts have also warned that it will likely become standard. Investors are watching developments closely, fearing contagion that could spread to other markets.
Left said Evergrande’s current liquidity crisis shows he was right when he wrote his 52-page report in 2012. Short selling is an investment strategy in which borrowed shares of a stock are sold with the hope of buying them back at a lower price. and make money with the difference.
“10 years ago, I wrote about how the company is playing fast and loose with debt and using aggressive accounting to mask its true financial health. I kept saying how the company’s pet projects cost billions in all off-balance sheet financing,” Left said. .
“Now everything I wrote about has come true and the Chinese people are suffering. This shows the importance of freedom of speech and short selling in markets,” Left said.
Angry Chinese investors showed up to protests in recent weeks and demanded their money back. Foreign investors, including major asset managers worldwide, are waiting to see if Evergrande will be able to make two interest payments due Thursday and next week.
‘China has a plan’
The crisis will wipe out the company’s stock, Left predicted.
“Equity is worthless in Evergrande and bonds are questionable,” he said. Evergrande shares have plunged more than 80% so far and yields on its bonds have skyrocketed. Bond yields and prices move in opposite directions – the higher the yield, the lower the bond’s price.
While the Chinese developer is in serious trouble, Left said the impact will be limited.
“Chinese banks will take a manageable blow and the people will get a landing, aided by the government,” he said. “I really believe this is not systemic and will not affect future investment in China or Hong Kong. I think the regulation of the tech sector is much narrower than this.”
“I believe China has a plan to wrap this up. It may not be pretty, but it will take a long time and they will save the system from below,” he added.
Left’s rebuttal to Hong Kong regulators’ ruling
Left was barred from trading Hong Kong’s stock markets in 2016 after the city’s Market Misconduct Tribunal found him guilty of market misconduct over the Evergrande report.
The tribunal also ordered him to repay 1.6 million Hong Kong dollars ($205,000) earned by shorting the shares.
Here’s what Hong Kong regulators claimed he did — and his rebuttal on every point.
1. Market misconduct
Regulators accused Left of market misconduct in publishing the report. In the report, he said Evergrande was insolvent and had defrauded investors. The tribunal said the Left’s claims were false and misleading.
Left said the report said Evergrande was insolvent or will be “soon” because the company’s liquidity “cannot handle” the amount of debt and off-balance sheet activities.
“I backed it up with photos and testimonials from nationwide protests. Their claim was ridiculous. I think we’re seeing that now,” he said, referring to the current liquidity crisis.
“Now look who is paying the price: the poor workers and people who entrusted Evergrande with down payments,” he said.
2. Lack of knowledge about local accounting practices
Regulators said Left had little knowledge of local accounting and financial reporting standards, and that he failed to consult experts or the company to verify the information he received.
Left claims he used GAAP standards, a common set of accounting principles and standards issued by the US Financial Accounting Standards Board, which publicly traded companies in the US are required to follow.
“The fact that I used GAAP standards and not Hong Kong accounting [standards] on a few data points, it doesn’t nullify the tone or the message of the report,” he said.
He told The Washington City Times that the courts would not allow him to question Evergrande’s chief financial officer or the company when confronted with the allegations.
“I had a trial where I wasn’t even allowed to question the company. It was so one-sided,” he said.
The tribunal accused Left of negligence in publishing the report.
Left insisted he was not negligent. “And if I was, are they going to sue any investment bank that has a target of $30 on the stock that generated huge bank charges without looking at the obvious?” he asked in the email. “That’s negligent.”
Shares of Evergrande stood at 2.58 Hong Kong dollars ($0.33) Thursday morning, and are down more than 80% so far.