China Start-Up Patron Attacks Short Sellers 李开复炮轰做空机构Citron

An entertaining war of words has broken out this week between one of the most outspoken short sellers of US-listed Chinese stocks over the last year and an China-based Internet veteran whose company is helping to fund many similar companies to the ones under attack. Followers of China’s Internet will know that the short seller I’m referring to is a California-based company called Citron, whose most recent attacks have targeted Internet security software maker Qihoo 360 (NYSE: QIHU) by questioning the company’s user data. The Internet veteran, meantime, is Lee Kai-Fu, a former top executive at Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG) who left Google in 2009 to start his own company called Innovation Works to fund Chinese high-tech start-ups. (English article; Chinese article)

Lee’s new criticisms of Citron are providing a refreshing new voice in the wave of short seller attacks that have lasted more than a year now, which have typically seen companies like Citron issue reports questioning company accounting practices that trigger predictable denials from the companies under attack. Lee, who is publishing his own attacks on his widely read Weibo microblog, is accusing Citron of harming an entire industry for his own personal gain, adding that Citron founder Andrew Left lacks understanding of China’s Internet industry.

Left has fired back that Lee’s attack is also motivated by self-interest, since Innovation Works has received funding from Qihoo 360 in the past. Lee responded by acknowledging that Innovation Works did receive funding from Qihoo, but that the amount was small and Qihoo isn’t providing any new money to Innovation Works’ newest fund.

So, where does the truth lie in this current war of words? Lee’s motivation for his attacks is at least partly motivated by the fact that attacks by Citron and other short sellers like Muddy Waters has not only hurt the companies under assault, but has also undermined credibility in the accounting practices of Chinese high-tech start-ups in general. That’s key because many of the companies that Innovation Works funds are just such high-tech starts, many of which hope to eventually make initial public offerings in the US or Hong Kong.

At the same time, it’s quite clear that Citron and Muddy Waters are also both motivated by a more basic self-interest, namely the desire to make some quick money by shorting Chinese high-tech company stocks and then writing damaging reports on the hopes that those stocks will drop sharply.

As a relatively unbiased observer in all this, I think I can honestly say that the kinds of accounting and number inflating practices that lie at the heart of many of the short-seller reports are indeed a very real issue. That fact was on display just this week, when media reported that yet another US-listed Chinese firm, China Sky One Medical (Nasdaq OTC: CSKI) is being charged by the US securities regulator with securities fraud. (English article)

At the same time, I do sympathize somewhat with Lee, as I do believe that the majority of Chinese Internet start-ups are relatively honest in their accounting, and many of the companies that may have been practicing creative accounting have probably become more honest in response to the scandals of the past year. At the very least, Lee’s attack is providing some much-needed balance to the current debate, and should help to silence some of the more gratuitous short seller attacks as those short sellers slowly lose their credibility.

Bottom line: A new war of words between an Internet stock short seller and a prominent Internet supporter are providing some needed balance to the yearlong assault on Chinese tech stocks.

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