Reuters Investigates

With Chinese small caps, it’s buyer beware

Today’s special report “Chinese stock scams are the latest U.S. import” shows again that when it comes to a bargain, it’s buyer beware. In this case, when a small-cap Chinese stock seems to promise outlandish growth, it might be worth finding out more before you buy.

Some of the questionable companies made their way onto U.S. exchanges via reverse mergers — a private company buys enough shares of a public firm to essentially become publicly traded.

NYSE and Nasdaq have delisted several companies and have a veritable “skid row” of more than a dozen firms that have been halted for weeks or months pending requests for information about accounting problems and late regulatory filings. (For an up-to-date list, see: http://www.nasdaqtrader.com/Trader.aspx?id=Tradehalts)

Of the more than 600 companies that obtained entry to U.S. exchanges via reverse mergers between January 2007 and March 2010, a total of 159 were from the China region, according to the Public Company Accounting Oversight Board (PCAOB). While many are legitimate, some turn out to be outright pump-and-dump schemes and other scams.

To read the story in PDF format, click here.

Here’s what happened to the share price of one company in the story:

The ETF war is hotting up

BOSTON – A battle royal is shaping up in the world of exchange-traded funds. After years of trailing in the race to attract new money from ETF investors, fund giant Vanguard is poised to take the top spot from iShares this year. But the big winners will be investors who are seeing fees plummet.

Aaron Pressman looks at the winners and losers in his special report “What did you do in the ETF war, daddy?”

Click here for a graphic on how the competition is shaping up.

This one shows how retail investors are looking to diversify their holdings.

The special report, which can be seen in multimedia PDF format here, is a warm-up for the Reuters Investment Outlook Summit which runs next Monday through Wednesday. Follow the summit here.

Inside the Pirates’ Web

Reuters trade correspondent in Washington Doug Palmer had an unusual assignment: buy a fake Louis Vuitton handbag on the Internet, and take it to a LVMH store for a comparison test, before handing it over to U.S. authorities.

    What was startling was how easy it was to find websites selling a dazzling array of stuff online. This is the new face of piracy and its costing businesses billions.   No need to skulk around back alleys or some pirate’s rental van to browse through footwear, watches, DVDs and whatnot. Just pick out your LV shoulder tote from a virtual catalog on a website based in China. It looks and feels like the real thing at a fraction of the price.

Counterfeit goods ranging from shoes to software seized by the U.S. government  on display at the National Intellectual Property Rights Coordination Center in northern Virginia, October 7, 2010.  REUTERS/Jason Reed  

    The bulk of these goods comes from China. The workshop of the world is also the sweatshop oif the world when it comes to making fake goods.

    Reuters Shanghai correspondent Melanie Lee and a photographer accompanied a private investigator to grubby neighbourhoods around Guangzhou to find the leather workshops that make these fake bags. She saw mothers and daughters through the windows working the leather, and young toughs outside serving as lookouts. Chinese authorities occasionally do raid these places, which are often run by triad gangs. Photographer Tyrone Siu stealthily took photos with his iPhone.

 Melanie and her PI then followed the trail of the fake handbags to an illegal market a few miles away. The Baiyun wholesale market, occupying a space equivalent to five football fields, is the biggest market for leather goods in the world. Much of the merchandise is counterfeit.

    The market is occasionally raided — including the day they went. But the shopkeepers are used to it. It’s like the Whack a Mole game. As fast as you can hammer down one operation, another one pops up somewhere else.

Mongolia’s El Dorado stirs shareholder battle

In Mongolia’s South Gobi desert lies Oyu Tolgoi, touted as having the world’s largest untapped copper and gold deposits. Little wonder then that this “El Dorado” has become a boardroom battleground between the relatively unknown Ivanhoe Mines and its biggest shareholder, the giant Australian mining company, Rio Tinto.  

Our attempts to get near this mine or elicit any comment from Ivanhoe were about as fruitless as the Spanish conquistadors attempts to find the legendary “El Dorado”, or “Lost City of Gold” in the 16th century. Twice Ivanhoe stopped our reporters from visiting the mine with delegations from the investment community, saying reporters were not  allowed to mingle with bankers on visits to the mine. We don’t know why that would be. We mingle with them pretty often in other contexts and usually find each other’s company amusing and mutually informative.

Perhaps that’s the point of Ivanhoe’s policy. The company and its executive chairman, Robert Friedland, do not seem to trust the media much. They maintain a robust website,   http://www.ivanhoemines.com/s/The_Facts.asp., that pretty much takes issue with every story written about them. Friedland is legendary in the business for spinning a story and trying to control the narrative.

Friedland has lived a colourful and adventurous life. Perhaps he admired in his youth the swashbuckling medieval hero of Sir Walter Scott’s novel, Ivanhoe, a noble in the disguise of the “black knight” who fights alongside Robin Hood, and so named his company after him. 

Friedland has had a Midas touch when it comes to monetising mining assets over the years in a business where exploration is fraught with risk. In that sense. he calls to mind the original El Dorado, or “Golden One”. This was the name given to the kings of the Muisica tribe in what is now Colombia, when they were undergoing an initiation rite for taking the throne: they covered themselves in gold dust before diving into lake Guatavita. 

In time, the Muisica towns and their treasures fell to the conquistadores, who never did find the “lost city”. Friedland can only hope that his efforts to foil Rio Tinto’s efforts to take over Ivanhoe on the cheap will fare better than the Muisica’s attempts to fend off the Spanish. He may need a Robin Hood or a “white knight”, however, to come to his rescue.

(Photo: Ivanhoe Executive Chairman Robert Friedland  (right) points out features of the control room at the Oyu Tolgoi gold and copper mine in Mongolia to the country’s prime minister, Sukhbaatar Batbold (centre). REUTERS/company)

Morbid money-spinners

If the life settlements market seems ghoulish, here’s a British scandal which isn’t doing the image of the business any favours. It’s one of the worst the country’s seen.

Around 30,000 mainly elderly investors in the UK put their money into a company called Keydata, hoping to make a little extra cash to fund their own retirement with the promise of a healthy return.

What they were buying sounded kosher, even if it did depend on how fast their wealthy American counterparts were dying. Of course, the investors may not have known that.

As is so often the case with these things, the projections were a little optimistic. And then some other irregularities blew up. Around 100 million pounds went missing, one of the business’s partners dropped dead in Singapore and the investment company was shut down by the regulators, leaving British pensioners like Tony and Pam Tobin out of pocket.  The Serious Fraud Office is investigating.

Undeterred, the other key character behind Keydata is determined to fight the regulators’ decision.  ”I am someone who can make the impossible possible,” he tells us.

Whatever happened to the stiff upper lip?