Richard Nixon: And so let us
start a long march... together.
Not in lockstep
but on different roads
leading to the same goal.
The goal of building
a world structure
of peace and justice,
in which all may stand together
with equal dignity.
Bill Clinton: First of all,
- our markets are already open - to China.
This agreement
will open China's market to us.
- George W. Bush: I would call - our relationship with China
Very positive... and complex.
- Barack Obama: The free market - is the greatest force
For economic progress
in human history.
- Donald Trump: - I will make a great deal
And lots of great deals
for the American people.
(echoing) Believe me!
(siren wailing)
Dan: What is capitalism?
Is it an economic system?
Or is it an apparatus
that we can use
to make more money
for ourselves
- and take more money - from others?
I think, at its heart,
it rewards those who work hard,
but it also rewards
those who...
are willing to...
take advantage of others.
- (indistinct chatter)
- (sirens and horns blaring)
There are no good guys
in this story...
including me.
(crew murmuring indistinctly)
- Yeah, yeah, that's good. - Okay...
- Man: What's your earliest memory - from childhood?
- That's a trick question.
- Man: Is it?
I... was not expecting it.
I don't know what my earliest
memory from childhood was.
- I imagine I was two years old - and I was busting
A fraud somewhere.
(chuckles)
Narrator: This is Dan David.
(train rattling)
The first time I met him,
we had a couple of drinks
at a TGI Fridays
in Penn Station,
and he told me
an almost unbelievable story.
Before the dust had settled
on the economic collapse
of 2008,
Wall Street had already
figured out a new way
to package garbage as gold.
- They were engineering - an enormous fraud
That spanned the globe.
- But this time, - the lies at the center
Of the scam were
100 percent legal.
This time,
the crime was based in China.
(train rattling)
(crow cawing)
- Narrator: Dan's part - of the story begins here,
Far from Wall Street.
The small investment shop
he ran with his partner Maj
had just been crushed
by the stock market crash.
Three o'clock. What's goin' on?
- Dan: People who had hedge funds - in 2008
Closed their funds
and started a new fund.
- Chris, you got anything? - Finishing working on
- What I'm working on now. - I'm just gonna...
- We decided right away - we weren't gonna do that.
- We were gonna make everybody - their money back.
- Narrator: They needed big gains, - quickly.
- But with the whole - Western world
- on the brink - of another depression,
Prospects seemed bleak.
(thunder rumbling)
- Narrator: It wasn't hopeless - everywhere, though.
The people in the know
steered Dan to China.
It was this exploding market.
- Soren: It was the only market - that people actually
- Were confident - would go up, was China.
- Mitch: This is gonna be - the largest economy In the world.
Let's invest in it now.
It blew my mind 'cause
it was so completely different
- from what I thought - it would be it was booming.
Crocker: There were certain
cities, you'd go one time,
- and you'd go a year later - again, and suddenly there'd be
A whole new shopping district
that didn't exist last time.
Gold rush.
There was almost no company
that you could invest in
in 2009 that was China-based
that you would lose money on.
- Roddy: For an American - set of eyes looking at this,
- you were just like, - "Well, my gosh,
"China really is
this golden land
of rapid economic growth."
- I really thought, - "Well, jeez, you know,
- "the American century - is over now.
This is it."
(seagulls screeching,
(waves crashing)
- Narrator: Everyone wanted - a piece of China.
There was just one problem,
foreigners like Dan
couldn't invest directly
in Chinese markets.
- That's where the small - California bank
Roth Capital came in.
- (indistinct chatter, - phone ringing)
- Narrator: Roth found a niche - that the big banks
Had overlooked,
taking small Chinese companies
and listing them directly
on U.S. stock exchanges.
Now Dan and others like him
could participate
- in the Chinese - economic miracle,
- and the bank's - young salesmen had the chance
- to make a killing - with the right pitch.
- Hey, Jed, - how are you doing today?
Great, what do you got?
- Well, we're working - on this new company.
- Would you like to hear - about a transaction?
Two days go by. Five days go by.
- Do you have - any interest in this?
- This is what we feel - the company's capacity
- Can go to - after this acquisition.
- These are fully registered - securities.
What do you want to do?
If they did have interest,
they would come back to you.
Yes. Yes.
Yeah, I'm interested.
$2 million worth.
Put me in for that.
Okay, great.
And that would be it.
I tried to make myself
be in the flow.
Think of a running river.
21 million bucks?
That's a pretty good fee.
- So let's say this is-- - Man: I'm worried, though.
I'm worried that the numbers
don't hold up from China.
Well, I never got asked that.
(chuckles)
No one ever asked that.
(seagulls screeching)
Roth is a second, third-tier
boutique investment bank
from California.
- Someone else had described it - as a frat house.
(chuckles)
Herb: Roth Capital would
get behind small companies
- and push them out - into the market.
They definitely
were heating up 2010, 2011.
Dan: Roth was well known
for doing China deals
- at a time - when we were looking.
We went to a couple
of Roth conferences.
It was a good time.
(static crackling)
Woman: Roth Capital Partners
has been organizing conferences
- for years in Orange County, - California.
- This has got to be - the best conference in America.
Company after company you
may have never heard of before
- makes pitches - to people with money.
And their business model
was kind of simplicity itself.
- Roddy: They'd have - a three-day extravaganza--
100, 150 companies--
And these CEOs would be saying,
"For these six or seven
or eight or ten reasons,
we think we're gonna
grow revenues 75 percent
- Dan: China has gone, - in the last few years,
From interesting to important.
And then it turns
into entertainment time.
(crowd cheering)
Matt: Snoop Dogg, Billy Idol,
dancers,
ice sculptures,
Trojan theme night, buses,
trains, planes--
And then baijiu,
- which looks like motor oil - in a can.
You drank and you drank.
You ganbei,
you cheers to somebody,
- and then they have - to cheers to somebody else,
And it goes on and on and on.
The Chinese wanted to see
- what kind of a person - you were,
And some of them felt like
the more drunk you got,
the more of your natural persona
would come out.
- Narrator: - The master of ceremonies
At these conferences
was often the bank's
stage-diving chairman,
Byron Roth.
♪ I wanna rock and roll
All night ♪
Performer: Get him up!
♪ And party every day,
I wanna rock and roll ♪
- Roddy: You know, this is a guy - who started out
In the commodities business
when he was 16 years old.
- His dad - had a feedlot business,
- and they'd bid on cows at - auctions and stuff like that.
- I mean, this is not - an unsophisticated man.
- We just do things that are-- - That are different.
- And that's kind of - the way we are
As an investment banking firm.
(crowd cheering)
Narrator: For Byron Roth
and Matt and Dan,
it was time to party.
Between 2006 and 2011,
Roth hosted over a dozen
conferences and raised
billions for Chinese companies.
Performer:
(rock music playing)
- Performer: Whoo!
- (cheers and applause)
(traffic humming)
- Narrator: - Roth wasn't the only bank
Cashing in on the China boom.
In New York, a small operator
named Rodman & Renshaw
ran investment conferences
with a slightly different feel,
- centered - on the political star power
Of its chairman,
General Wesley Clark.
- Male Announcer: In the Balkans, - he helped negotiate a peace
Between bitter enemies
and led a multinational force
that stopped
a campaign of terror.
Wes Clark's life is simply
an American story,
but he will make
an extraordinary
American president.
Man: First I want to ask you
to just tell us who you are,
- and tell me a bit - about your background.
- Yeah, I'm retired general - Wes Clark.
Graduated from West Point
in 1966.
- Went to Oxford, went to Vietnam, - came home on a stretcher.
- Signed as a NATO - Supreme Allied Commander.
I ran for president
in 2003, 2004.
Went into investment banking.
- Narrator: Rodman & Renshaw - had a troubled past.
- After years - of management turmoil,
They declared bankruptcy
in the late '90s.
- But with a luminary - like General Clark
- as their public face, - they'd reemerged
As a respectable-looking bank,
hosting parties
and selling Chinese stock.
They would typically invite
presidents,
ex-presidents, Colin Powell,
Diana Ross, Henry Kissinger.
- Roddy: For an hour or two, - having Henry Kissinger
Or George Bush
or Wesley Clark speak--
- Boy, oh, boy, - like you're going into
Some inner sanctum of knowledge,
when, you know,
- Kissinger's 90 years old, - talking out his ***.
- You can see - what's happening there.
- They're renting a name - for an hour or two.
- Wesley: These people all work - for fees.
That's how they make money.
When luminaries speak at it,
more power to 'em.
- Narrator: During the six years - that General Clark Was chairman,
Rodman & Renshaw brought
over 40 Chinese companies
to U.S. markets,
with an aggregate value
of over $31 billion.
- Narrator: While Rodman and Roth - made fees
- for bringing Chinese companies - to the U.S.,
The real paydays came
when the companies listed
on major stock exchanges
- Their analysts would - recommend the risky stocks
As great investments,
and then their salesmen--
Like Matt, would push them
on their investment network.
(tickers clicking)
- Narrator: Once the stocks rose - high enough,
- the banks and insiders - could cash out,
- leaving others holding - the overvalued shares.
- The catch was, - listing a company
On the stock exchange
normally required audits
and public vetting,
but the banks found a way
around all that.
They used a backdoor process
called a reverse merger.
It's dollar denominated.
It trades onshore,
- the New York Stock Exchange, - the NASDAQ.
It's normally a shell company
that is a public-traded stock
- that has no operations - underneath it.
You need to go to Nevada.
A lot of them were there,
- that had started off as - mining companies or whatever,
And they were just sort of
sitting there, waiting,
you know, to find
the right partner
who could merge into them.
So you need the shell company.
- Narrator: Here's how - these reverse mergers work.
- a Chinese company - looking for a way
Into American exchanges
merges with the shell
of a defunct U.S. company
that no longer operates
but still legally exists
and has a listing
on a U.S. stock exchange.
The Chinese company then takes
the shell company's place
in the market.
Presto! You just appear.
- You're a stock - that's trading in the U.S.,
And you've got a story to tell.
And no one asks any questions.
(applause)
Narrator: Between 2006 and 2012,
over 400 Chinese companies
listed on U.S. markets.
80 percent of them
were reverse mergers.
Our exchanges
are monitoring them.
Our banks are vetting
these companies.
- You don't have - to worry about them
- Because they're - on the U.S. exchanges.
Dan: Oh, you're in Hong Kong?
Late on the 30th.
Dan: Between 2009 and mid-2010,
the average China-based
reverse merger
was up several hundred percent--
The average!
- Could you tell me - what China did last night?
- We stuck with - our value-investing approach.
And with that approach
and with our guidelines,
that took us to a lot
of China-based companies.
- And we made - several hundred percent
On all of 'em.
Longwei Petroleum,
bought them, $1, $1.50.
We sold, $5, $6,
500 percent profit.
L&L Energy,
bought them for under $2,
sold it between $9 and $10.
- Puda Coal, bought them - for around $4,
- Sold them for around $7, - great company.
China Agriculture, CAGC.
$9, sold them at $28.
All great companies.
We were back.
Narrator: By 2010,
- Dan and the guys - at Roth and Rodman
- were making a killing - on the China stocks.
- It seemed like - it would never end,
- and maybe it wouldn't have, - had it not been
For one earnest young
American businessman
who'd gone to Shanghai to seek
- a completely different - type of fortune.
Carson: The business I set up
- was the first - self-storage business
In mainland China.
- It was called - Love Box Self Storage.
World-class.
And we did win an award
for self-storage facility
of the year.
- On the way to setting up - that business,
I co-authored "Doing Business
in China For Dummies."
Narrator: Carson's father,
a stockbroker back in the U.S.,
- wanted to invest - in Orient Paper,
A company that Roth Capital
had brought to the markets
through a reverse merger.
- The company claimed that - it was doing $100 million
In business a year
and shipping tons
- of high-quality paper - all over China.
- It was one of - the fast-growing companies
That Roth and Rodman had sold
- and that investors - like Dan had bought.
- Richard: The goal was - to do some research,
Make sure that it was legit.
- His father would - write up the report.
Again, a fairly easy
to understand
and analyze business
the opposite of
an American software company.
- Narrator: Carson and a friend - went to check out the factory,
But right away,
something seemed off.
Carson: It was a country road.
It was in poor shape.
That road could not support
the massive trucks
that would be going in and out
of that facility all day.
Then we got into the factory.
(indistinct chatter)
Roddy: It was a complete dump.
Half the machines were broken,
weren't working.
Garbage rotting
out in the front yard,
no signage.
- And this is their main - manufacturing facility.
- There's water everywhere, - all right?
- This is a company - that's a paper company.
- Carson: The company had just - claimed to have clocked in
$100 million U.S. in revenue,
which was up substantially
from the year before.
How was this growing
50 percent a year?
- On the balance sheet, - they were showing about...
$5 million in raw materials.
- Carson: And so they had - heaps and heaps
Of this old corrugated
cardboard out front.
- Carson: My friend climbed - one of those heaps
To take a look at the expanse
of rotting cardboard,
- and when he came down, - he said,
"If this is worth $5 million,
- the world's a much richer place - than I knew."
Carson and his dad looked
at each other at that point
ah, and said, "There's probably
something to do in this stock,
- but it has nothing to do - with owning it."
(camera shutter clicking,
(flashbulb whining)
Carson: This business
was a complete sham.
This is going to zero.
It's a total fraud.
- I've never seen - anything like this.
- Narrator: Carson wrote a report - of his findings
- and announced that he was - going to back his claims
By making a bet in the market
that the stock would collapse.
- It would change - the course of his life,
But more importantly,
it was the first time
anyone had poked a hole
in the Chinese miracle.
- Carson: - I sent it out into the ether
In late June of 2010.
I stayed up for a little bit
to watch it close,
and going into the close,
it just moved down a little bit.
And so as I went to sleep,
I wondered whether that was
a reaction to the report.
- Well, the next day - answered the question
Down 25 percent.
And it ended up trading down
as much as 55 percent
- from where - we had put out the report.
- Even though it's China - and it's a fast-growing economy,
Pigs do not fly in China,
and I think that...
- Carson: - There's a proverb in Chinese,
"Muddy waters makes it
easy to catch fish."
(speaking Mandarin)
(in English)
Yeah, so it means water.
Huh.
- That saying, - "Muddy waters makes it easy
- To catch fish," - explains so much
- About what goes on - in China.
Carson:
Opacity creates opportunities
for people to make money.
That's China's view,
muddy waters.
- I thought that - that was a very apropos name
For the firm and chose it.
(waves crashing,
(seagulls screeching)
- Narrator: - The "Muddy Waters Report"
Was the first major claim
- against a Chinese company, - and it began to resonate
Throughout the industry
- nowhere more so - than at Roth Capital,
Who'd engineered the deal.
- Target price, - less than a dollar.
- You have pictures - of dirty factories.
- You have pictures - of recycled paper on the ground.
You have people climbing...
pictures.
This is a $150-million company.
It's pretty crazy though.
- Matt: I had sold - over $22 million of that deal.
- Matt: I remember - going into Byron's office,
Asking, "What's going on here?"
Narrator: What was "going on"
was that the company
had deployed a classic move
in the reverse-merger playbook:
get a stamp of approval
from a trusted source.
- Deloitte and Touche - had come out
- With an independent - investigation saying
- That the company was - accurately telling
About its financial statements.
- Narrator: - In the mortgage crisis,
Banks used rating agencies
- to disguise - crappy mortgage bonds.
Now Orient Paper was using
- an even more - recognizable cover
- one of the Big Four - global audit firms.
- Every day, - all around the world,
- Deloitte professionals are - making an impact that matters...
- Narrator: - It turns out that dozens
Of Chinese reverse mergers
used the same trick
hiding shady financials
- behind audits - from the Big Four.
- It was like handing investors - a shiny, thin file
- Stamped, "Trust me." - (bell dings)
- Because when it comes - to living our purpose,
It all starts with integrity.
Carson: Whether it's Deloitte
or PwC,
they expect these brands
to have significant value
wherever they are in the world,
but in actuality,
- the way these partnerships - are structured
Is that each office
is its own entity.
- Roddy: So they were able - to dollarize
Renting their name out,
effectively.
- All they hoped was that - this company didn't collapse.
(indistinct chatter)
- Many of these companies - would say, "Well, look.
- We're being audited - by Pricewaterhouse."
No, they're not.
They're being audited
by Pricewaterhouse China,
which is like a franchise.
- It's not really - Pricewaterhouse.
(siren wailing,
(indistinct chatter)
- Jim: In the United States, - whenever we've had
A massive fraud--
That we've been short
- people always ask me, - "Well, who were the auditors?"
- And I always say, - "Who cares?"
- Jim: - It's important to understand,
- and most people - don't know this,
That the financial statements
are prepared by management,
not by the auditors.
(siren wailing)
Jim: Auditor's job is to simply
review management's work.
- And if management is trying - to hide something
Or has co-opted the auditors,
they will hide it.
- Narrator: - If hiding it doesn't work,
They opt for plan B.
Hire a good lawyer.
Orient Paper brought in
Mitch Nussbaum of Loeb & Loeb
- to respond - to Muddy Waters' allegations.
- Mitch had helped bring dozens - of Chinese companies to market,
And he knew how to fight back.
- You have short sellers who-- - Who go ahead
- And put a short position - on the company
And then throw all sorts
of allegations against them...
- Narrator: Nussbaum's firm - led an investigation.
His unsurprising conclusion
- was that Carson's allegations - were false
- and that his report - amounted to slander.
- How-- do I know what anybody's - telling me is true?
- Host: That's a huge problem. - It's a huge problem.
Host: All right,
Man: Let's talk about
a case where you did a type
of forensic investigation--
- Um hmm. - Producer: Orient Paper.
I wouldn't be prepared
in these circumstances
to discuss or present any more
or additional information
- than what we disclosed publicly, - because that wouldn't be,
You know, appropriate.
- Narrator: The Chinese businesses - were a huge profit center
For Loeb & Loeb,
- but I imagined - that the company's
Often-shoddy paperwork
- posed a problem for Nussbaum - and his colleagues.
- I wondered how just how much - diligence they had to do
To satisfy regulators.
- Forget about the lawyer. - Forget about the banker.
- The banker doesn't go - into the books
And records of the company.
- The lawyers don't go - into the books
And records of the companies.
We don't go check
to see whether
the shipments were received.
- You know, we don't go visit - the customers' homes.
I mean, no law firm does this.
No law firm does this.
- Narrator: - This is the part of the story
- where I had to do - a double take.
All of the people who
we think of as gatekeepers,
- the lawyers, - the bankers, the auditors,
The people making good money
- to ensure that - the markets are clean,
- weren't doing - anything of the sort.
They simply processed
the necessary paperwork,
took their fees, and moved on.
- If the companies were lying, - so what?
- (thunder rumbling, - rain pattering)
- The answers - that I was receiving
Was insufficient
to thwart my concerns.
- And I didn't feel they were - thorough enough
Answers to questions.
(thunder crashing)
Matt: And that's when
everything significantly
changed for me.
My eyes were open
to this concept
that there was another side
to this company.
Matt: I knew what my job was.
I knew what I couldn't do
- if I was sitting - in that seat still.
So for me, it was... quit,
go take a break,
and see what happens.
I went on safari.
I'm at a Rodman & Renshaw
conference,
and a firm by the name
of Muddy Waters
puts out a report
on Orient Paper,
and it goes down significantly.
And this is the first time
that we're actually hearing
- somebody's publishing a report - and calling it fraud.
Dan: We decided that
we were either good
at what we do
or we were lucky,
and if we were lucky,
- we were about - to go out of business.
- Chris: I'm trying to reach - either the general manager
Or the property manager...
Dan: So we hired our own team.
- Dan: - And our own team went to China
To vet some of these companies
that were accused of fraud.
Man: Let's talk about
China Green Agriculture.
- China Green Agriculture - came to our attention
Originally in 2009.
Dan: And we invested long
into what we thought was
a great fertilizer company.
Their stock was pumping.
Press releases were coming out
about deals they were making
with Nestlé and whoever else.
Narrator: Dan calculated that
- in order - to fulfill these contracts,
- dozens of trucks - would have to be loading
And unloading goods all day.
- So even though - monitoring private companies
Is illegal in China,
- his team risked - lengthy jail terms
To set up surveillance cameras
outside the factory gates.
We filmed them for 344 days.
- Tapes showed us - of very little activity going,
- Very few employees - coming in and out.
- Narrator: Dan figured that - if the company was doing
- what it said it was, - it would have
Hundreds of employees
and dozens of drivers.
Dan: So what we do is,
we have our investigator
pose as a tea salesman.
- So he shows up, - and he's got a suitcase
Full of tea samples,
says he's a tea salesman
and he wants to give
free tea samples for everybody.
(in Mandarin)
Dan: So tell me how many
employees you have here
- so I can give you - enough samples.
We get that answer.
(in Mandarin)
- Man: What did it mean that - they only had one truck driver?
It meant that their volume
was vastly less
than they had claimed.
In the first half of this year,
Ah, Yongye grew both revenues
and net income by about
- Narrator: Calling out - China Green Agriculture meant
- that Dan was also questioning - the integrity
- of some of the guys he'd ridden - the China-stock wave up with.
Guys like Crocker Coulson,
- a stock promoter - who'd pushed this stock
And dozens like it.
What about, um,
China Green Agriculture?
Crocker: So that's another
fertilizer story that we were...
Again, this kind of goes back
a fair ways for me.
- Yeah. - I believe that was
An organic fertilizer.
It was also supposed to have...
um...
- I really don't remember - a whole lot about that company.
What we came up with is,
they were doing 10 percent
- of the business - that they claimed.
And then the fight began.
Dan: Puts out a press release
calling us terrorists,
saboteurs, criminals.
- There was a statement from - five Beijing finance professors
- Who alleged - wealthy and sophisticated
Short sellers from overseas
- were robbing - small Chinese investors
And ignoring risks
of market instability.
They didn't cite any evidence.
Just to be clear,
we put a lot of effort
- into trying - to weed out companies,
- You know, - before representing them
And then to flag problems,
- serious problems, - if we saw them.
There was no way to know
- which were the good actors - and bad actors.
A gate guard
knows what's happening.
(seagulls screeching)
- Dan: So we went - to the investment banks.
We took them our evidence.
We said, "Look what we found.
- If you hire us and our team - to do diligence,
You'll have a better product
- to sell to - the American people."
They said, "Get out of here.
You're telling us to pay you
not to collect 10 percent fees
- on every transaction - done through this bank.
The less we know, the better,
and by the way,
- if you tell anybody - what you found, we'll sue you.
Go back to Skippack."
So we went back to Skippack.
We published our research.
- Narrator: Dan's report laid out - his allegations
- against China - Green Agriculture.
Dan: The stock trades
for a dollar today.
- You know, it turns out - nobody believes them.
- Man: What happened - to the chairman?
Nothing.
I mean, he's kept the money.
- And that's what this - is all about, right?
That's $113 million that has
just, poof, vanished
Ah, because they never really
did that kind of volume.
- Narrator: Dan realized he'd made - money off of companies' lies,
And it gnawed at him,
because he knew he'd crossed
into what a lot of people see
as the dark side of finance--
Short selling.
(jingle playing)
Herb: What is short selling?
Hmm, let me think about this.
- I want to-- this is always - a difficult one.
But short-- (chuckles)
What is-- (chuckling)
- Well, the first short - economically
Was probably some transaction
between, you know,
two Cro-Magnon person,
promising some guy--
Some other Cro-Magnon
part of a saber-tooth tiger.
Narrator: This is Jim Chanos.
He's the dean of short sellers.
- And he's brought down some of - the biggest frauds in history.
- If you want to think - about short selling,
- All kinds of commercial - transactions are short selling.
An airline that sells you
an advance-purchase ticket,
for example,
is shorting you a seat.
Short selling is betting
that a stock is gonna go down,
as opposed to go up.
So shorting a stock,
you'll often hear it referred to
as "borrowing shares."
- Narrator: This is where - a lot of people get confused.
- Here's a simple way - to think of it.
- Narrator: - Say I want to short sugar.
- I think that sugar - is overvalued
And it's going to cost less
in, say, six months
than it does today.
I see a business opportunity.
I go to my neighbor
and borrow one pound of sugar.
Then I turn right around
and sell that sugar
- for the going rate - of $1 a pound.
Manly Voice: Yeah!
Narrator: In about six months,
- when I have to give my neighbor - a pound of sugar back,
I go buy it on the open market,
where the price has come down,
and it only costs me 50 cents.
- I give my neighbor - a pound of sugar back,
- plus a little extra - for interest,
And pocket
the 50-cent difference.
She's got her sugar back,
and I've made money on my bet.
You want everybody else
who's trading in that stock
to believe what you're saying
- if you think that - the company is a fraud
Or you think that something
about the company is not true.
The person that's most
attracted to short selling
- is probably those who've been - dropped on their heads at birth.
They're iconoclasts.
- Do I believe that their - motivation was to--
Was justice for the world?
- No, I think their motivation - was to profit from this.
It's about cleaning
our financial markets.
It's about stopping a fraud.
What I really want to do is,
I want to reach in...
- Narrator: Remember this guy, - Dick Fuld?
- He ran Lehman Brothers, - the bank whose collapse
Set off the financial crisis
in 2008.
- He's got an opinion - about short sellers.
Rip out their heart,
and eat it before they die.
(crowd laughing)
- Mitch: So there are - a lot of problems here.
- There are a lot - of problems here.
- Dan: - When I bet against a company,
It's because I believe
that they're misrepresenting.
- And their trend line - doesn't matter to me at all.
I am somebody that will
bet against fraud.
- Narrator: As Dan and Carson - began looking
- for other Chinese companies - to short,
- Matt was just getting back - from his safari.
He'd been out of the loop
and wanted to make sense
of what he'd been a part of.
So he asked his friend Soren,
- a finance industry lawyer - from New York,
- to meet him for a weekend - in the mountains
- and take a look - at some of the documents
- he'd saved - from his time at Roth.
In the process,
they would discover a new way
- to look at the whole - landscape of fraud.
Matt said,
"Just look at these companies.
Tell me what you think."
L&L Energy was nominally
a coal company.
- Soren: - Very typical of an RTO fraud
In that
its financial performance
was simply too good to be true.
(man speaking Mandarin)
Soren: The notion
that a small reverse merger
from rural China could somehow
efficiently mine
and process coal
so much better than the best
coal companies in the world
was just not credible.
- Narrator: - Digging into the papers,
They uncovered a new way
- to understand - what was really going on
- with the hundreds - of Chinese companies
Listed on U.S. exchanges.
What we came back with were
what are called SAIC filings.
They're these filings
from the State Office of, uh...
- Oh, my gosh, can't believe - I'm blanking on this.
State Office of, uh, Adminis--
- State Administrative Office. - Is that right?
- Richard: The interesting part - here was that
The filings in China
tended to be very accurate
or more accurate than
the fictions that were filed
- with the Securities - and Exchange Commission.
Narrator: In China,
a company might accurately say
they made $10 million,
while in the U.S.,
they could report
making $100 million or more.
- These SAIC filings - were dead reliable.
They showed exactly
what was going on.
(crows cawing)
- Dan: And this is-- this is - the cultural difference,
We can't find auditors
in China that will help us,
- because let me - tell you something,
If we do find those people,
- the government of China - will kill 'em.
- I mean, they will take - their *** out
- And shoot them - in the ****ing head.
- Soren: This was, from the - beginning, a deception.
The purpose of it
was to deceive,
from day one, and we'd
never really seen that
at this scale
in the United States market.
- And that's probably why - it took everyone by surprise.
Narrator: That included Matt,
and his reaction was telling,
- maybe it says something - about human nature,
- about why we keep getting - into these messes.
- He realized that hundreds - of millions of dollars
In Chinese reverse mergers
that he'd sold were frauds,
but he didn't react
with shame, just pragmatism.
He wanted to make sure he got
a piece of the ride down,
so he switched sides
- and became a short seller, - like Dan.
I-- I did it
and made 78 percent in...
four days.
Eventually LLEN collapsed.
- Narrator: For short sellers - like Dan and Matt,
- the filings were the final - piece of the puzzle--
- not just evidence - from one company or another
- but data from - all the companies.
- For the first time, - they could see
- the full scope - of the deception.
- Carson: I don't know - what the numbers are,
- But it's well into - the billions of dollars
That U.S. investors have lost.
- $30 billion, I think - the number was $30 billion.
- $20 billion. - $50 billion.
- It's between - $20 billion and $50 billion
Of market capitalization
of stock that's listed
here in the United States
that might be worth zero.
Individual
mom-and-pop investors
and mutual funds were invested
in these Chinese companies,
so it really does affect
- the average person - on the street as well.
Soren: If this one company
is so brazenly fraudulent,
- what does that say - about the rest of the market?
Soren:
Over 300 reverse mergers
with businesses operating
in China.
- This whole thing - could be fraudulent.
- And that money - could never be recovered,
And if you got caught,
there was no consequences.
- When you talk about - the investment banks,
Especially the bigger ones,
fraud is baked
into the income statement.
How many investment banks
have had to pay fines this year
for fraud?
Wells Fargo? Check.
- Bank of America has in the past. - Check.
- Morgan Stanley has in the past. - Check.
Nobody's going to jail.
It's a fine.
So it becomes part--
It becomes part
of what you budget.
You budget for fraud.
(traffic whooshing)
Narrator: Maybe Dan's fixation
on fraud comes from the fact
that Flint, Michigan,
where he grew up,
- is the victim - of a kind of fraud.
(train whistle blows)
Big companies made big promises
to the people who lived there,
- and in the end, - they couldn't keep them.
Dan saw firsthand how lies
coming from corporate offices
- actually affect - real people on the ground.
- Where other finance guys - see market machinations,
Dan sees his hometown,
busted, full of ghosts.
- Dan: This was a pretty nice area - 30 years ago.
Hmm.
Dan: This was a school.
- Dan: By today's standards, - it was pretty violent.
I mean, I can't even imagine
10, 11, and 12-year-old kids
- swinging bats - at each other today.
No, I was definitely--
- I was happy growing up here, - for sure.
Dan: Companies lie.
Companies lie.
Companies have companies'
best interests at heart--
Not a community's,
not a people's.
The people need to have
their own interests at heart.
Flint's an awesome town.
- It's always been - an awesome town.
Very hardworking community.
All right, look.
I saw myself growing up in Flint
and staying there forever.
And then the jobs were gone.
(thud)
(wind blowing)
- Narrator: Dan had investigated - the companies
From the ground up.
- Matt had seen - the bird's-eye view
Of their SEC filings.
Together they began to realize
how shockingly simple
the whole thing was.
- Let's say that you wanted - to construct a fraud.
- Matt: What you would do is, - you would have a factory.
You would have a chairman.
- And then you would find - someone,
A gatekeeper, for example.
A finder says,
"This is your business.
What could you do
with $100 million?"
Matt: He would help with
connections with auditors,
legal tier-three banks.
- Dan: This operator in China - would be like,
"Well, that'd be--
It would be a game changer."
- "I'd buy up my competition. - I could do this.
- I could do that. - I'd be this big."
Get to the United States.
- Dan: This guy or this company - in China
- would say, - "Okay, I'm gonna get you
A $100 million,
but this is what you have to do.
You have to tell people
that you're already this big."
- You just had to make sure - that you checked all the boxes
In order to get it to be sold.
Dan: And don't worry,
because if they even find out
that we're lying,
you won't go to jail.
- You're in China." - All you needed was
- The collusion - of a couple players,
- And you could defraud - anyone you wanted.
- Dan: And if we're lucky enough - to get the money
And they find out you're lying,
you get to keep the money.
- So there's really no risk here. - I'll do all the work.
All you have to do
is continue to tell the lie.
(money counter whirs)
- You know, - if you're gonna be a CEO
- Of a public company, - you've got to be educated,
Gone to college, got an MBA.
These guys had zero of that.
Zero, a lot of these guys.
They came from second,
third-tier cities in China.
- They came from a different way - of doing business...
- Like running - their own candy store
Type of way doing business.
(chickens clucking)
Dan: A Chinese chicken farmer
does not wake up one day
and understand how to defraud
the U.S. capital markets.
From the creation
of these little companies,
- it's all about - stock market fraud.
(applause and bell ringing)
- Narrator: Once Dan, Matt, - and the other shorts
- figured out - the basic characteristics
Of the China frauds,
they started taking them out,
Puda Coal, the chairman,
stole investors' shares.
SINO Clean Energy,
super technology.
- This company puts advertisements - on buses.
- Dan: They would crush coal, - mix it with water,
And that was energy...
phenomenal.
They hired none other
than Loeb & Loeb to sue us.
China Integrated Energy,
for weeks and weeks and weeks,
there was nothing happening
- All of a sudden, - things get turned on.
Lights start working.
The next day,
Rodman & Renshaw shows up
with a busload of investors.
Take a tour of the facility,
get back on the bus, leave.
All the lights go back off.
Rodman investors,
invest in a bunch.
You continue to find really
interesting anomalies in China.
I talked to the people
who were running
that were feeding a steel mill.
- "We're making a profit - on this now,"
- And then they said, - "Yes, but there's a problem.
It seems that
the gauges were wrong,
and we, uh, did not deliver
as much gas
- as we charged - the steel mill for."
- I said, - "When did you find this out?"
They said, "Just last week."
- I said, "And how much were - the gauges wrong?"
"Uh, by the exact amount
of our profit.
It's very strange."
- I've been told I am addressing - the Honorable Ho,
- Whose ancestors have been - the glory of their provinces.
I am humble Ho,
whose name stands in deep shadow
- before the tincture - of the great company.
In China, business is done
following a tradition
of not having a particularly
strong legal system.
So people rely more on trust
and on personal relationships.
I shall gain merit in the eyes
of the company
There's a lot of focus
on building those relationships
so that you can build the trust.
The Chinese call this network
of personal relationships,
Paul: And so I give you small
gifts and I do you favors,
and then you owe me one.
You scratch my back,
I'll scratch yours.
- Paul: If you do enough favors - of people,
You have the ability
to call on them
for a favor that might be
quite inconvenient for them.
And that they would feel
an obligation
to actually go forward.
Narrator: This notion
that guanxi
but represented something
more powerful is crucial.
- Dan had told me that going - after Chinese companies,
Could be dangerous.
But it wasn't until he told me
the story of Alfred Little
that I really understood
- Dune: When these short reports - started coming out,
- There was a website - called Alfred Little.
And it started publishing these
very interesting reports,
- the sort of the shoe leather, - like,
"We've gone out and we sat
in front of this factory,
and this is what we found."
The website described
Alfred Little
as an investor
with 35 years of experience,
- I think he was supposed - to have worked at Deloitte.
- You know, maybe he lived - in Shanghai.
- I mean, there was this whole - backstory, right?
Dan: He basically says that,
- all these companies - in China are fraud,
Are just wholesale bullshit.
And I was dismissive of it.
I can't remember the date,
but I got an email saying,
"I'm gonna be in New York.
Let's meet."
I was like, "Oh, okay,"
so I go to this hotel,
- and there's this guy, - and he's like,
"Oh, I'm Jon Carnes."
- Like, - "I'm the guy who's been...
- You know, I'm Alfred Little." - (laughs)
(alarm bell ringing)
Narrator: As one of the few
Westerners still working
inside China,
Carnes knew how to be careful
and cover his tracks.
Posing as Alfred Little
had served him well.
- But when he decided - to take on Silvercorp,
A mining company
in rural Hunan province,
he and his investigators
would find out the dark side
- You know, some companies - are more aggressive than others,
But in general, I've found that
the more truthful the report,
the more difficult it is
for a company to explain
these negative truths,
the more likely they're going
to commit some form
Because if
a company can't answer
the questions raised
by the short seller,
then they look for other means
to stop the negative reports.
(wind blowing)
Narrator: As Alfred Little
began to publicly
- the company's stock price - started to drop.
- Company officials called - in favors
With the local authorities.
- Police began to threaten - Little's chief researcher,
Kun Huang,
detaining him for hours
or days at a time,
- demanding to know whom - he was really working for.
(siren wailing)
- Carnes knew that - there was no cavalry coming.
He'd asked the SEC for help,
and they said their phones,
- let alone protect him - and his team.
(speaking in Mandarin)
He sent another researcher
to secretly record evidence
that local police
officials were doing
He would use the videos
as leverage to try
(in Mandarin)
(man speaking Mandarin)
Kun: (in Mandarin)
- Narrator: - Kun had made secret videos
- of Silvercorp's - under performing mines,
- and some of the local officials - they had bribed.
He was detained briefly
twice in late 2011,
- and officials promised - to leave him alone
- if he would expose - and denounce Alfred Little.
He refused,
and later that year,
he was stopped at the border
as he tried to flee
(in Mandarin)
(indistinct voices over radio)
(siren wailing)
Dan: What...
how many shares short am I?
No shit.
- (knocking at door) - Hmm.
Narrator:
Before Jon was exposed
Dan thought he was a crackpot.
Jon: Hey...
- Narrator: Now, along - with Carson, Matt, and Soren,
- they're part of - a loose-knit tribe.
Activist short sellers chasing
down frauds in China.
Most of them are realists,
believing the market finds
the truth on its own.
Dan is different.
He takes it personally.
Jon: Kun keeps going to
the psychologist once a week.
- That was a great thing - you did, though...
Not cutting him loose.
- Taking care of him - while he was over there.
- How many of these other guys - we know would've Just cut him loose.
We owe him a lot.
- Narrator: - Kun's imprisonment changed Dan.
As far as he was concerned,
- this wasn't about - just uncovering frauds anymore.
It was about right and wrong.
His friend had gone to jail,
- and millions of people - were being ripped off.
He wanted government action,
- even if it meant - putting himself
- and the other shorts - out of business.
So he hired a lobbyist and came
up with a plan to try
- and make Congress - pay attention.
Both Toomey and Casey, are
on the Senate Finance Committee.
- Mm-hmm. - So what I was asking for is
A Senate Finance hearing.
- You're, you're talking - to staffers who bounce
- From meeting to meeting - to meeting to meeting To meeting.
- So I think a lot - of people don't even know, This really happened.
- Anyone I talked to, - anyone even involved
- In the stock market, - doesn't even know.
A lot of people don't know.
So here's the frustrating part.
- It was the first meeting - that we had with Toomey's staff.
Um, he, he actually suggested,
after an hour and a half,
- a letter-writing campaign. - Right.
Number one, you know,
welcome to 2016.
- Um, - but I guess those still work.
- Two, I spent an hour explaining - to him,
- That nobody knows - they're being ripped off.
- How do I get people - to write a letter
- About what they don't know - is happening?
If we give up, you know
what happens out of Washington,
- You have to be at the hearing. - You have to consider yourself An expert.
- That's why we're going - to Washington,
- That's where we're trying - to effect change.
(hand thumps table)
- It's a very frustrating thing. - Mm-hmm.
And I just...
- don't want to hear how - the world works anymore.
(wind whistling)
Narrator: Dan had a plan.
(train rattling)
There was a Senate hearing
on whether or not
- poses a strategic danger - to our economy.
He'd use it as
an opportunity to meet
- And get him to listen - to his concerns.
- Would you vote for him - at this point?
- How'd I vote? - Oh, right, right.
- I'm sorry, I'm sorry. - I'm having a casual conversation
With you and I forget.
- Well, let me just say this, - I won't vote
For the mother****er.
(train rattling)
- Dan: I think that there are - a great many people
- that it's their job - to give a shit.
If you're going to run
for office on the idea
that you're there to protect
citizens' interests...
The rights of citizens,
then you should do your job.
Thank you, sir.
- Or let somebody else do it, - that will do it.
(indistinct chatter)
(gavel banging)
- Shelby: Today, the Committee - will hear testimony
On the Chinese economy
and the risk it may pose
to the United States.
- Some believe - that China's economic stimulus,
Following the 2008
financial crisis,
has left the financial system
with an unusually high
percentage of bad debts.
China's not transitioned, uh,
to a market economy.
- It's not lived up - to the commitments it made
- When it joined - the World Trade Organization.
- Chinese government props - up its state-owned enterprises,
Also called SOEs,
and designated private firms,
while limiting market access
- for U.S. - and other foreign firms.
- Narrator: Dan had hoped - that Senator Toomey
- would address some of - the questions he'd raised With his staff.
But he left the hearing early.
- And it went downhill - from there.
I'm not sure that I see this
as something that we really need
to be too worried about.
- What we do need - to be worried about more,
Is the continuation
of the imbalances in China
and what that might imply...
(gavel banging)
How fast is
the Chinese economy growing?
I don't know exactly.
We don't have reliable figures.
- Desmond: You know, - I pretty much agree
That China's not growing
at 6.7 percent.
It's rather growing
at something, uh,
So, if the Chinese
credit bubble pops,
whether it's sooner or later,
dragging the Chinese economy
down with it,
what kinds of vulnerabilities
might we see?
I don't see the impact as being
through direct exposure
- of United States companies...
- So, so you're not worried
about the exposure
through derivatives
- that, for example, - put our banks,
Deeply engaged on the question
of commodity prices
or other financial
transactions more direct?
Not through China itself...
(indistinct chatter)
I'm Dan David.
I believe Tom gave you
- Oh, yes. - Yeah.
I'll believe you'll find that--
"The China Hustle."
That's right. That's right.
- If you, uh, read that - and you're interested,
- I'd love to talk - to you about it.
- Okay. - So, couple of hundred billion In fraud, and it continues.
- It's not over. - It goes on every day.
- Great. - Yeah, any one of them.
Dan: Very cursory and...
- Okay. - ...dismissive and generic.
- Anecdotal. - The only thing I heard
At the end
was Shelby saying, uh,
- you know, we got - to face reality.
- That was it. - Okay, the reality is,
- They're gonna do nothing - about it. - Right.
The biggest, eh, you know,
you can guarantee losing
- by not doing anything. - Dan: That's right.
(door closes with a thud)
- Man: Uh, why did you come down - to Washington?
Dan: I was hoping
to move the ball forward,
- advocating - for investors' rights,
To... show up and see
what's actually done
at a committee hearing.
- Man: - What happened at the hearing?
Not much.
(siren wailing)
Jon: I think
that what Dan's doing to try
to get Congress to take action,
is a good thing.
Do I think that's the way
to solve the problem? No.
I don't think so.
The entire staff of
the SEC hasn't busted,
- more than one or two - of these frauds.
- A handful of short sellers - have busted,
Forty or fifty of these frauds.
Dan: Coach, you need one?
- Yeah, I guess so. - Is he still living out In France?
- Dan: Excuse me, ladies, - can I get you anything?
Soda, water, beer?
Pop, can you get Sean a beer?
- No, he can help himself. - (all laugh)
He's a big guy.
- (all laugh)
- Uh-huh.
- Dan: Geo Investing. - Man: G-O?
Dan: G-E-O.
(indistinct chatter)
- Dan: I'll bet against them. - (all laugh)
- And I'll write a report, - and I'll publish it.
And I'll say they're a fraud
and I'm short.
But when they do go to zero,
I win, but you all lose.
We're losing our ***.
- Started out good. - We didn't get any...
- Dan: This is the skim that comes - out of everybody's account.
It's pennies from everyone...
that adds up
to hundreds of billions.
So you're campaigning
to get something to happen.
- Dan: So that I won't - make money anymore.
- You're a good man, Danny. - Yeah.
- I always thought - you were like that.
- No, you didn't. - (all laugh)
And I'm not. I'm not. I'm not.
It just...
- just doesn't sit well, - that's all.
- Explain to me again, - why you make money and we don't.
- You bet against them. - That's short them.
Okay.
Graduating with a 1.6...
(laughter)
(all speaking at once)
- I'm kidding. I'm kidding. - Dan: There's two things there.
- Dan: One, I had no idea - I actually graduated.
(laughing)
Carol read something
about something going on
in China right now,
where they've discovered
what they think to be aliens.
- Wasn't it deep down, - they found 'em?
(woman speaking indistinctly)
- Well, that would be - a new wrinkle.
Well, that would make
what I've been doing
- Nothin'. - (laughs)
- Thousands of years ago. - Yeah.
Yup, I think he might not
come home in one piece.
(laughter)
Jim: At the end of the day,
investors counting on the SEC
to save them from their own lack
of due diligence, or greed,
are kidding themselves.
- Mitch: We have more opportunity - in our markets than anywhere In the world.
But, at the same time,
we don't have a regulator
that looks over our, our filings
- and says, "I want to protect - the public from this."
- Our system... you know, - we file with the SEC,
- and the SEC reads - the disclosure, And they comment
on, on the disclosure.
- They don't determine - whether it's viable To be public or not.
- They don't make - that determination.
- They let the free market make - the determination.
Warren:
The SEC should do its job.
Your job is to look out
for investors,
but you've put the interests
of the Chamber of Commerce
and their big-business members
at the top
of your priority list.
Narrator: It is the SEC's job
to protect investors.
- But it was chartered - in the 1930s,
At a time when stock prices
rolled off of ticker tape
and the markets closed at four.
Now, they're outgunned
and outmanned,
like Keystone Cops chasing
the starship "Enterprise."
Even if the SEC
gets its entire wish list
of documents from the company
- and they have enough evidence - to pursue a case,
The Chinese people responsible
for this, don't really care.
- Dan: When somebody breaks - the law here,
There is a process
where they're accountable.
- At some point - in a China-based company,
That accountability ends.
And it ends at the ocean.
Narrator: This is one of
the first things
In China, it's not illegal to
steal from foreign investors.
- I couldn't believe - the SEC would allow companies
To list on U.S. markets,
if it really had no way
to police them.
So I found an employee
of the Chinese
- who was willing to take a risk - to confirm the truth.
(in Mandarin)
Bottom line is,
- the Chinese government - and the U.S. government,
On most levels,
don't work that well together.
(sirens wailing)
Dan: You can't compel somebody
that has stolen millions
and millions of dollars
from U.S. investors
to come here from China.
- You can't compel them - to testify.
You can't even find them.
- Dan: Forget about - the average person
- who thinks that their broker - or the SEC will protect them.
- Even someone - like Crocker Coulson,
Who worked inside the system,
couldn't find out
- what was really going on - with these Chinese companies.
- Crocker: You're in - an alternate universe.
There's kind of this arms race
to do the simplest things.
- You can't even look - at the bank statement.
You can't even go into
the local bank and ask them.
- A lot of times, - the manager of the local bank,
Will actually reprogram
the books of the bank
to make it look like the books
of his client are better
Gregory: Anytime you have
a country like China,
where information
is not easily obtained,
any society like that
is a much greater risk.
In the United States,
we can go directly to a firm
and we can subpoena
those records.
- To get records out of China - is significantly more difficult,
If not impossible.
If you wanted to set out
to be a criminal,
- probably the best place - to be a criminal
Is someplace with no cops,
and that was China.
It was the Wild West.
(airplane engines whooshing)
(indistinct chatter)
(horn honking)
I am delivered.
I'm at the airport.
Just headin' to the hotel.
Narrator:
Dan was like Nicolas Cage
where he's the only one
who knows that
He's screaming about it,
but nobody cares.
The auditors, the bankers,
Congress, the SEC...
(murmuring indistinctly)
- None of them see - the financial tsunami
- that Dan sees - coming from China.
So he decides to do
the one thing he can do,
take the criminals' money.
Dan: Their share count
has ballooned,
from a whopping 4.9 billion
shares four years ago
to 6.5 billion shares today.
- It appears that the only way - that they can continue
- To sustain - their business operation,
Is through dilutive financing.
(camera clicking, whooshing)
Narrator: Normally,
Dan publishes
But this time,
there's too much at stake,
a nearly $2 billion company,
Tech Pro.
- He believes - the company's chairman,
- is misallocating - shareholder money
To lavish on pet projects.
- If he can convince the markets, - he'll wipe the company out.
- It'll be his - biggest short ever.
- Dan: Now, I don't know - what that tells anybody else,
- But, there's something going - on here.
Our due diligence,
is a lot of black smoke,
lot of black smoke
coming out of this company.
That's a fire.
That needs to be looked into.
(indistinct speech over radio)
(radio stations changing)
(overlapping speech)
(alternative rock music playing)
♪ To change the world ♪
♪ I want to ♪
- Joining us on the floor - of the exchange right now,
Dan David. He's co-founder
of due-diligence firm,
Geolnvesting.
- And I see here, - you also specialize in China?
- We do. - My Sohn presentation in June
On Tech Pro,
Tech Pro's down 91 percent.
- Woman Host: Is it vindication - for you when you see a stock
- Like that plummet? - Well, it was inevitable.
- I... The stock was always going - to plummet.
Are you bullish
on China at all or is it just...
(cello playing)
Dan: What is capitalism?
Is it an economic system?
Or is it an apparatus
that we can use
to make more money
for ourselves and take
At its heart,
it rewards those who work hard,
but it also rewards those
who are willing
to take advantage of others.
- Narrator: When we describe - a fraud like this one,
- we use terms like - "white-collar crime"
To distinguish it.
But really, it's just theft,
- in its way, as violent - as being mugged in the street.
It can be traumatic to chart
the trail of personal loss.
How much was stolen
from each pension fund,
each retirement fund,
each of us.
Soren: The real story
is the aggregate value.
It's the investors who,
by the end,
These were mostly
just people playing
- who looked at the financials - and believed them.
- Alexandra: That money is money - that belonged
To individual
mom-and-pop investors
who thought, "Hey, I want to be
a part of
And they were also shares
that belonged
to mutual funds, like Vanguard,
that manage money for,
for example, The New York Times,
- right? - The employees.
My pension fund money.
Roddy: We sold ourselves
on a myth of China
as a really compelling market.
A nation that wanted
the leveling effects
of free trade.
- Matt: You should - have known better.
Man: Well, what I would pay,
if I have my money in Fidelity,
- isn't that... - why do I pay these guys?
I don't know. I don't pay 'em.
- I don't give 'em any - of my money.
It's like a game
of musical chairs,
when the music stops,
- if you're left holding - the paper,
- If you're left holding - the shares,
You are the victim.
(sirens wailing)
Okay, um, my name is David Yee,
and I live in Atlanta, Georgia.
My name is Ray Snader.
I'm a print and broadcast
journalist
in Newport, Tennessee.
Tom Snodgrass
from, uh, Spring, Texas.
- David: What attracted me - to U.S.-listed Chinese stocks,
Were the high returns.
- There was a lot of hype - about them and
A lot of attention.
I was hoping to have
a nice retirement egg
for my wife and myself.
I do not have
a retirement plan at my job.
My wife doesn't have
a retirement plan at her job.
Roth Capital, issued
a buy recommendation.
The first company that really
kind of caught my eye,
- was AgFeed. - Allegedly they were
The largest
feed producer in China.
My last shares,
that I purchased,
were $9 a share.
We recouped... 12 cents
on the share.
And, we had a total
of about 26,000 shares.
Man: What kind of loss did
that represent for you,
It represented,
about a $150,000.
I think I lost well,
well in excess of a $100,000.
- My investment in these - U.S. listed Chinese companies,
Represented at least 50 percent
of my assets.
The prices tanked,
and they were eventually, um,
delisted and not tradable.
- Man: Worth zero.
- Worth $0 per share.
We put our faith in the market,
in our government
to police that market.
And I think, uh, we got burned
on literally every turn,
in that particular transaction.
Ray: Roth Capital issued
a buy recommendation.
I'm not sure that they visited
the plant at all in China.
In fact, today,
I'm not sure that there was
a China Electric Motor company.
- How old are you, Ray?
- I'm 68 years old.
(cello playing)
- Narrator: So where - did the money go?
To the bankers and lawyers,
who helped set up the deals.
And to the Chinese executives
who made millions
- while their - companies collapsed.
I don't know what's worse,
- that the executives were beyond - the reach of the law,
- or that the enablers - on Wall Street were operating
Inside the law,
just doing their jobs.
One way or another, almost all
of them got away with it,
scot-free.
One exception,
was Rodman & Renshaw.
- Do you have just a moment, - General?
No.
- During the heyday - of the reverse-merger boom,
They doled out
almost $18 million
in bonuses to their executives.
- But their problems - caught up with them.
In 2012,
they paid a $315,000 fine
- and surrendered - their brokers license.
- Soon after, - they filed for bankruptcy.
- Wesley: So I want - to make sure you understand.
My investment bank
is called Enverra.
- Man: Right. - It's not Rodman & Renshaw.
- Right. - I was the chairman Of Rodman & Renshaw,
I was not a banker
at Rodman & Renshaw.
I didn't have anything to do
with the financial transactions
That wasn't me.
- I'm the guy that told them, - "You got a problem with it."
And I left the company, uh,
a year or so,
- 18 months after that, - from the board.
My question is,
who did he tell?
How about, "And then
I went down to Washington
- and saw all the people - that I know while I was running
For president...
- and told them - what was going on"?
- I don't think I want - to be in the film.
I think it's just...
it, it invites attacks on me.
- And I don't need that. - I'm trying to build a business.
I don't want to be attacked.
I didn't do anything wrong.
- You're chairman of the board. - What role was it?
- A non-executive chairman - of the board?
- Was he the person - who ran the business,
- Or was he really there - as a figurehead,
- To lend his name - to the credibility
Of this situation?
I mean, that's the classic.
It's like Monica Lewinsky.
- Forget about Monica Lewinsky. - It doesn't matter
What you say about it.
It's a bad story.
- So let's, let's - just cancel this session, okay?
- I'm sorry I wasted your time. - Matt: Do I,
- Do I send - shame on people?
Do I say, "Shame on you
- for not asking - the right questions?
Shame on the auditors
for allowing this shit
- Shame on the regulators - for not making
- The, the requirements - more stringent and difficult"?
- So, you don't think - we have a problem here?
You want to blame this
on any one or two people?
- (stammers) - Ridiculous.
It's ridiculous.
The whole thing is b...
It's broken.
- Wesley: Let's get out of this. - This is a mistake for me.
- It's a mistake for the people - that depend on me.
I've got a firm.
- I've got people - that work for me.
I owe them my best opportunity
to give them a living.
And, this doesn't help.
This hurts.
So I want out of this.
Man: Well, I'm not...
- This is not an attack piece - on you, sir.
Wesley: It doesn't help...
- Man: That's not, - that's not my intention, Nor is that...
Wesley: Uh, I thought
I could do this
but I realize I can't.
- You know? - I...
Roddy: China is fundamentally
a broken
or ****ed-up societal system.
The people who get to the top,
get to the top
by breaking rules.
Good people who want
to play by the rules,
- get stepped on and pushed - to the bottom of the pile.
- This, in some ways, - has nothing to do with China.
- If you gave American - management teams
That incentive structure,
- oh, my God, we'd have - the same amount of fraud here.
- It was just a no-brainer - for them.
Bulls versus bears, constantly.
And now that I'm deemed a bear,
I don't know if I'm ever
gonna be able to go back
- But, no regrets working - for them.
My clients made money.
(inhales)
Ping:
- We've never seen - a credit buildup
- To the likes of what - China is doing today,
That hasn't been followed by a,
a major, major financial crisis.
So, stay tuned.
We, we have, by far,
the most vibrant markets
in the world. By far!
And so, that freedom,
leaving those decisions
to the private sector, you know,
it, it frees up
a lot, a lot of capital.
- This is the largest - financial crime
Of the last 25 years, with
the exception of Bernie Madoff.
It's still way too easy
for the bad guys in finance
- to keep Washington - off their backs.
We're cutting regulations.
I would say 70 percent
of the regulations can go.
I think you see a lot
of the similarities with
in, in '08
and the China situation.
We had our chances,
post-global financial crisis,
- in my opinion, - and we missed it.
This was sort of the appetizer,
in, in that these were
the small, crappy companies
that, often times,
were demonstrable frauds.
We point to $50 billion,
- and that's like - an empirical number.
That's a number
we can say, "Boom."
We can point to this
and this fraud
and tie it in nicely on a bow.
What we don't talk about
is that there's hundreds
of billions of dollars
- that we can't even - begin to touch.
- And the fraud - that can be perpetrated...
Through China
by other means.
So it's not $50 billion,
and it's not
some investment banks,
and it's not some people
in the United States.
It's everybody.
It's every bank.
(sirens wailing,
(bell ringing)
Whether they know it or not.
The Chinese e-commerce giant,
Alibaba, took Wall Street
- The company - had its initial public offering
On the New York Stock Exchange.
Woman Reporter 2: The share
price jumped 38 percent...
This is a perfect storm.
Yeah, the eBay and Amazon
and PayPal is pretty easy,
- but it's a Netflix; - it's a Groupon...
I mean, it's a perfect storm.
- It's the first time - a major Chinese Internet company
- Has gone public - in the United States.
- Uh, there's an old joke that - the biggest lie on Wall Street,
- Is that this time, - it's different. (chuckles)
- Woman Reporter 2: Alibaba's - profit for the second quarter,
Jumped some 179 percent
to $2 billion.
It's a perfect storm.
That's what this is.
You don't have the ability,
to really research it.
You're buying lottery tickets.
Alibaba is lottery tickets.
- Woman Reporter 2: - Charismatic founder, Jack Ma, Has the stage presence
to rival many tech icons.
Should we jump in
and buy Alibaba stock?
Yeah, it's China.
- Is there something looming - down the pike
That's even crappier than this?
I, I could make that argument.
- Male Reporter: There's Jack Ma, - having met with the president.
Jack and I, are gonna do some
- great things. - Small business.
- Thank you, Jack. - Thank you, sir.
The CEO of Alibaba,
Jack Ma, says,
In this country,
when anyone says,
- "Just trust us," - the first thing you do is,
Hold on to your wallet.
You don't trust anybody,
- and you don't trust anything, - you can't see and research
For yourself.
And that goes for Alibaba too.
- Man: So why do you keep at it? - **** 'em.
They're lying.
(crowd cheering)
(pop music playing)
- Performer: Hot masseuse, - hot masseuse, right there.
- Here we go. - Joe, bring your drink down here.
Come on.
Wait, we got it.
I just want to raise a toast
to all of us, all right?
I want to raise a toast
to an awesome 2015,
- to a great year, - to being blessed,
- To everything you want. - Here it comes, all right?
- Let's raise 'em up. - Let's raise 'em up.
Raise your arms up.
(crowd cheering)
(guitar riff)
(crowd cheering)
- Give us some house music. - Let's keep this party going.
(crowd cheering)
(drums playing)