By Jacky Wong
Hong Kong’s legal action against a short seller’s research will have a chilling effect for independent analysis, left and right.
Andrew Left, the short seller who warned about Valeant Pharmaceutical last October, has been deemed “reckless” and “negligent” by a Hong Kong tribunal for spreading false and misleading information about highly indebted China Evergrande Group /zigman2/quotes/208605330/delayed HK:3333 -6.45% /zigman2/quotes/202468092/composite EGRNY -3.35% . The city’s regulator brought the case against the Los Angeles-based short seller’s Citron Research for a report it published in 2012 that said Evergrande was “insolvent” and used fraudulent accounting.
In the report, Left’s use of tabloid language to make his investment case was possibly over the top, but he did point out a number of issues that should worry Evergrande investors. The ballooning debt load and weak cash generation, for instance, are even bigger problems for Evergrande today.
This is not the first time Hong Kong, through its Securities and Futures Commission, has targeted critical research. It reprimanded Moody’s ratings firm for “mathematical” and “input” errors made in a 2011 report that highlighted “red flags” at some Chinese companies. The errors at issue in that case aren’t unheard of in analysts’ reports. Goldman Sachs, for example, once put a company called Xingda as its “conviction buy” in 2011, only to downgrade it two days later due to a mistake in “revenue mix calculations.”
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