Citron Reports on Lithium Exploration (OTCBB:LEXG) – A nostalgic piece for the “Old Lemon”.


  Citron Revisits "Old School"

For this story, Citron is going “old school”.   But we just had to “keep it real” … as you will read below.   It is not a surprise to anyone that Lithium Exploration (LEXG) is a scam.   

Streetsweeper did a nice job profiling the lack of underlying business at LEXG:

OK, so we know there is no business, and for a CEO they put in the resident “patsy”.    Sadly enough the CEO of this high flier just got foreclosed on his house 6 months ago.

Foreclosure doc

But who is really behind this stock?  For that we read the disclaimers in these egregious stock promotional pieces that will one day serve as evidence in the promoters’ trials.

In the disclaimers we read that this stock promotion was paid for by Gekko Industries, Inc.

With a simple search through the Nevada Corporate Registry (a favorite place for Vancouver Stock Promoters) we read that Gekko, a defunct corporation, was controlled by William C Robertson and Robert Rosner.

These two have collaborated many times in the past on numerous now defunct public companies throughout the US and Canada.  One of their stocks, Wataire International (WTAR) trades for fractions of a penny after a 2008 SEC inquiry into the use of spam in stock promotion.

But this is where it gets all nostalgic for Citron.  The President of Gekko, William C. Robertson was the subject of a Citron article 10 years ago (yes we have been at this for a long time) while he was involved with Burrard Technologies.

Robert Rosner was also a major investor in Burrard as evidenced by this SEC filing:

So what ever happened to Burrard?  It became Pegasus Wireless, and as expected< they were sued by the SEC for fraud:

But here is where the story gets real interesting …so read up, promoters.   The CEO of LEXG, we are told, is Alexander Walsh.  But not according to the Nevada Corporate Records.  They have the president of Litihium Exploration as Nanuk Warman.

Why Citron finds Mr. Warman so interesting is that he was the President of a company called Neutron Enterprises.

Most recently Nuetron’s claim to fame is that it was one of the 4 stocks manipulated by stock promoter George Georgiou who just received a 25 year sentence…yes that is right no typo….for Stock Promotion.

In the government’s case against Georgiou it says the following statements about Neutron   …  does it sound just way too similar to LEXG???

“In the spring or summer of 2004, Georgiou told the CW about his plans to manipulate Neutron. Georgiou told the CW that they could make a lot of money by illegally pumping up the value of Neutron stock through manipulative devices such as match trades, wash sales (or “crosses”), and e-mail blasts (electronic mailings sent to induce purchases

Georgiou also told him that he controlled the company and that he and his group were buying up the entire float. He further stated that he planned to run promotional campaigns to increase the volume and price of the stock. Based on Georgiou’s promises to the CW to issue non¬restricted shares and to provide him with a discount in a private placement, the CW agreed to participate in the manipulation, to get others involved, to have them buy and “park” the stock, and then to sell when directed to do so.”

So a question for the promoters:  are you the guy more likely to do the 25 years or the guy who becomes the CW (cooperating witness)?  A copy of this report has been sent to the SEC attorneys on the Georgiou case. 

Citron can write pages on how this is not a real company with no real operating but we are not going to insult our readers.  You know that.  What we cannot figure out is why in an age where a stock promoter can get 25 years in jail, would people actually let the Lithium Exploration promo happen?  I guess you can never underestimate the other guy’s greed or stupidity.

Citron has done its best to ascertain the identity of Gekko Industries.  If it is not in fact the same Gekko Industries referenced above, then please share with us which one it is.

Cautious Investing To All



Citron reports on Longtop Financial (NYSE:LFT)


“Money made through dishonest practices will not last long”Chinese Proverb


To think the fraud in the US listed Chinese stocks is limited to the RTO market is naïve.  Citron introduces a story that has all the markings of a complete stock fraud — with off balance sheet transactions that create outsized margins and management with backgrounds unsuitable to run a public company.

The most obvious risk factor in the China space, and the factor that has linked so many of these collapsed stocks, is obviously “the story too good to be true”.    Which brings us to the curious case of Longtop Financial (NYSE:LFT), a company that produces software for the banking sector.   In this report, Citron outlines several concerns which should be considered by the auditors as they prepare the company’s annual audit.  It is the opinion of Citron that every financial statement from its IPO to this date is fraudulent … read on to understand.

   Margins far in excess of competitors




      Market Cap 



 388 m 



1,450 m 



 619 m 


 Camelot Information Syst.

916 m 


 Longtop Financial

1,460 m 


LFT reports spectacularly high margins — much greater than any peer company.  In the fiscal year March 2010 LFT reported gross margins of 69% and non-GAAP operating margins of 49%. Peers report gross margins between 15-50% and operating margins of 10-25% or even lower.

Management's explanation for the high margins is that they have more standardized software sales then peers and standardized software has very high gross margins of around 90%. The company claims that these solutions and modules can be deployed to new customers with fewer  man-hours and expenses.

Furthermore, even if you believe the standardized software gross margin is 90%, then this implies that LFT is generating 60-65% gross margins on customized software development which is still much higher than peers.   If the China space has taught us anything, it is that when something seems too good to be true, it probably is.  So what is the real reason for these supersized margins?

  1.  Unconventional Staffing Model

Until recently, the vast majority of LFT's employees were not directly employed by the company. As of March 31, 2010 LFT had 4,258 employees of which 3,413 (80%) were employed by third-party HR staffing companies.

Of the employees at staffing companies, 95% (3,235) were from a single firm called Xiamen Longtop Human Resources Services Co (XLHRS), but this entity has no verifiable business presence except for LFT.  (The remaining 5% were being serviced by Beijing FESCO and Randstad Shanghai Temp Staffing, both of which do have a verifiable business presence beyond LFT). 

LFT has consistently claimed that (XLHRS) is an unrelated party.  The existence of Longtop Staffing has allowed LFT to transfer the majority of its cost structure off-balance sheet which creates opportunities for massive accounting fraud.  Does any of this sound unrelated to you?

  • Xiamen Longtop Human Resources (XLHRS) shares a name with its only customer:  Longtop Financial.
  • XLHRS was formed in May of 2007, just months before LFT’s IPO
  • Even though it is its largest line item expenditure by far, XLHRS is never mentioned in filings until the annual report filed July 2008.
  • XLHRS has no website and does not seem to be soliciting any customers, even though they just lost their only customer
  • LFT did not have any long term contract and did not have to pay any penalties or minimums in their relationship with XLHRS
  • XLHRS used the same email server as their only client — as evidenced by these help wanted ads placed by them that ask perspective employees to contact them at “  For example, this is a 2009 job listing listing for XLHRS using a email address:   
  • As of writing of this report, Citron has reason to believe that XLHRS has for months been located in the same building as Longtop Financial. 
  • When the outsourcing agency relationship was challenged, the company’s response was to terminate it, and take all the employees in-house.

Same building, same email, same name, no other customers … but a totally unrelated party? 

If in fact XLHRS is discovered to be anything other than a completely independent company, then every financial statement from inception to the present will have to be restated, and Longtop will go down in history as “another China fraud stock”.

Previously, the company claimed this outsourcing arrangement was part of the justification of its outsized margins.  Yet now that they are dumping XLHRS, the company says there will be no financial penalty, no cost and no margin loss associated with “taking a Mulligan” on the whole relationship!  Great trick!

“Extreme outsourcing” is a common characteristic of other stocks in the China space that have collapsed under findings of fraud.  Why?  Because it obliterates transparency.  For example:  the large advertising sales teams responsible for CCME’s huge reported income couldn’t be located – the company claimed they were outsourced.  Similarly, DGW and DYP claimed outsourced distributor networks; reality was another matter.

We understand that Citron is making a bold claim in saying that Longtop is committing fraud by setting up their own HR Company to lay off certain liabilities.  What the outsource maneuver does is make invisible a lot of metrics that would afford meaningful insight into how the company operates, such as ratios of revenues per employee, costs per employee, etc.

Even though all the indicators and evidence would suggest XLHRS is a subsidiary of LFT, and not an unrelated party, would management be that brave to set up a company with the same name in order to deceive?


  2.  Key Management Background Misdeeds

Study the past if you would define the future.”  Confucius

Before they founded Longtop, Chairman and CEO Jia and Lian worked for a company named Xiamen Dongnan Computer Co.  They conveniently left this out of their bios in the prospectus.

Mr. Xiaogong Jia is one of our founders and has served as the chairman of our board of directors since our inception in June 1996. Mr. Jia has over 29 years of experience in China’s IT industry. He is currently a standing director of the China Business Council, director of Fujian Computer Society, vice-president of Xiamen Computer Society and standing vice chairman of Xiamen Software Industry Society. Prior to founding our company in 1996, Mr. Jia has served various positions including deputy head engineer, vice general manager and general manager of Xiamen Longtop Electronic Computer Company.

Mr. Weizhou Lian is one of our founders and has served as our director and chief executive officer since our inception in June 1996. He has over 20 years of experience in China’s IT industry. Prior to founding our company, Mr. Lian held various positions, including technology department manager, sales department manager, vice general manager and general manager, of Xiamen Longtop Electronic Computer Company from 1985 to 1996.


A reason for this omission could be that they were sued by their former employer for unfair business practices. 

Translated Case: Xiamen Dongnan vs Jia Xiaogong and Lian Weizhou

In the lawsuit, they were found liable for drawing salaries from their old employer while working for their own company. 

Leading up to mid-1996, Jia Xiaogong (LFT Chairman, aka Ka Hiu Kung) and Lian Weizhou (LFT CEO, aka Lin Wai Chau) were working as managers at Xiamen Dongnan Computer Co (XDCC) and its parent company.

On July 15, 1996, unbeknownst to their employer, Jia Xiaogong, Lian Weizhou, and two others set up a company called Xiamen Dongnan Rongtong Electronic Co (XDREC), and allegedly  recruited 43 of their co-employees.

The suit also alleged that on October 15, Lian signed a contract with one of XDCC's major clients, but inscribed on the contract that he was working for XDREC instead of XDCC. The two company names sound very similar in both Chinese and English so it would be likely that the client thought he was signing a contract with XDCC.  (The good ole’ same name confusion trick!)

And this is what we found most amazing:

Then, on November 26 Xiaogong and Weizhou allegedly sent a letter to the Xiamen Postal Office stating, “due to our business needs, our address has changed from 5th floor, Huli Information Building to 11th floor, Huanjian Building, Xinzhong Road, Xiamen; please forward all relevant mails to the new address".  The new address was a PO Box they set up to illegally intercepting the mail of their namesake company.

It should be noted that this was no ordinary case.  It went to the high court in Fujian.   Talk about a “textbook case” – this case has literally become one!  Here it is referenced as one of the cases in the book entitled:

"Anti Unfair Competition Law: Principal Cases"

So we are supposed to believe the management would never pull the same name trick…..even though they have done it in the past.  Do You Really Believe This??

At the very least, had this track record of management been properly disclosed in the prospectus, investors would have had the option of considering it before deciding to plunge hundreds of millions of US investment dollars into this company.  This was, after all, the foundation of the current Longtop.  Would the IPO have actually closed?

  3.  Non-transparent Management Transactions

In a day in age where Warren Buffet and Bill Gates are pleading with billionaires to give half of their fortune away to charity, Longtop Founder and Chairman Hiu Kung Ka has gifted 70% of his stock holdings to his own employees and friends in the first 4 years of the company being public.  This transaction is not just fishy… stinks.

We challenge anyone, including the analysts, to find any CEO or Chairman of a publicly traded company on any exchange in the world, who has “gifted” this amount of stock to his own employees. 

Does the guy — who set up a dummy P.O. Box to divert his employer’s mail and steal its customers –seem like the kind of guy who would just give away his net worth with no encumbrances?  We know that Hiu Kung Ka is a shrewd businessman who doesn’t mind playing loose with the rules.  And we are supposed to believe that he has just “gifted” 9 million shares, valued at over a quarter billion dollars?

It is the opinion of Citron that this transaction has an undisclosed “tail”.  Was money used to either pay off hidden liabilities of the company?  Or does it generate an undisclosed benefit to Mr. Ka?   Either way, this type of transaction undermines the credibility of management, which, in the absence of full transparency, must extend to revenue recognition, acquisitions, and staffing cost issues, LFT’s largest expense.

 4.  Audit is coming – will it be a day of reckoning?

LFT is audited by Deloitte Touche Tohmatsu, the mainland China arm of Deloitte & Touche.  Prior to this year, investors would have regarded Deloitte as “the gold standard” for accounting in China. 

However, in the wake of the CCME debacle, in which Deloitte’s recent resignation letter identified no less than ten separate instances of the most egregious corporate malfeasance, Citron has to wonder how it was that Deloitte was all too happy to sign off on CCME’s books in 2009.

Obviously the halo over Deloitte’s head has been broken.  There are a lot of bridges to be crossed before Longtop’s current-year audit can be put to bed.

A Note to Analysts

Last week the analysts were quick to defend the company –against accusations that were never made.    Instead of just dismissing any bear case … Citron says do what you are paid to do … start ANALYZING.  The last thing Wall St. needs is more discounted cash flow analysis based on asking for management’s forecasts. 

Citron challenges you to answer these concerns without starting with the phrase “after discussions with management”.  Do LFT’s margins truly pass the smell test in cost-competitive China?  Does the staffing story make perfect sense to you?  How about management’s stock gifts? 

If not, what are the risks of “massaged” revenue recognition, and/or the ugly implications of related party impacts on acquisitions, cost accounting, and stock transactions?

Other Issues

As telegraphed by the analysts and management, there are concerns about the revenue recognition from some of LFT’s larger customers.  We will save all information on the revenues for Part 2 of our reporting on LongtopThe other issues that will be addressed in future reports are beneficial ownership of its acquisitions and the nonsensical answers the company has given for its unusual staffing model, which leaves critical investors thinking they are just “making it up as they go along”.

Cautious Investing to All



Why Citron Believes This DEER Has a Target on its Head


Every day someone asks Citron, “So which Chinese RTO is the next to go?”  As we properly called China Media Express, and have publically stated and stand by our opinion that China Biotics is a complete fraud, we can’t help but add that Deer Consumer Products (NASDAQ:DEER) might become the next casualty of the Chinese RTO markets.  The similarities between CCME and DEER will be explained in this editorial piece.

Just like CCME — Growth too good to be true

DEER’s business is the manufacture and wholesale distribution of small electric kitchen appliances for household use.   This business is highly competitive worldwide, and especially  in China, where there are literally dozens of manufacturers of products such as juicers, blenders and rice cookers.   The company sells both to domestic markets, and private labeled products for export.   Deer is just another one of the smaller players in the Chinese low end kitchen appliance market.

Yet, DEER’s financial results would have us believe that the company’s domestic business has grown over 400% year over year, with increasing gross margins, accomplished with minimal to no expenditure on advertising, and no evidence of expenditure on representatives at the retail level to support sales.

Deer reports operating margins 46% higher than its strongest competitor, which is over 8x DEER’s size (Joyoung).  Nonetheless, a recent article in Chinese business news shows the difficulty in turning profits in the China small appliance market.

So just like CCME, we see a company with stratospheric growth, reporting a return on equity that is not consistent with other publicly traded companies in its space.  Furthermore, we see margins that are not consistent with the rest of the industry.

Must Give a “Little” Respect

Citron first read about DEER Consumer Products after reading the work of blogger Alfred Little.  We have to give credit where credit is due, as Little has done a definitive piece of work on this company.

In response, the company attempted to distract investors from the business operations and instead focused on a questionable land purchase that was researched by Little.  Citron does not even want to address this issue.  We also will not address the hidden subsidiary / related party allegations by Little.  Land purchase or not, we believe the company is not being honest about their underlying business.

Common Sense, People … Chilling Similarities to CCME

For those of you who remember Citron’s initial report on CCME, an initial red flag was the lack of internet presence for a company that was supposedly doing gangbuster business.  We see the same thing with DEER.  Alfred Little did a series of channel checks that you can believe or not believe (we tend to believe), but here is something that cannot be denied.  Here’s a channel check anyone can do without visiting dozens of department stores in China:  A simple check on the website Taobao, the consumer part of Alibaba, lists the rankings of small kitchen appliance makers in China.

If you notice…Deer is ranked #51 in their “Attention Index”.  By comparison, BBK, the company that exited the business because of low margins and competition in the aforementioned article, ranked #17.  To take it a step further, we can observe the number of transactions on DEER products.

If you go to this page, you will see that Taobao actually lists the amount of products sold in a recent period.

For Deer, the top selling item only sold 9 and most items have sold 0.  Does that sound like a company who is growing domestic sales by over 400% year over year?  Compare this to Joyoung, who has sold thousands of their items per week.

Yet, as mentioned above we are to believe that DEER has an operating margin that is 46% greater than Joyoung.

Does this make any common sense?

As a funny aside, we encourage you to listen to this video of Ben Wey where he refers to DEER as the “world largest manufacture of juicers and blenders”   (1:09).

The Writing Is On the Wall!

In a time where every day there seems to be another Chinese RTO stock that is imploding, the SEC has finally taken notice and established a task force to fight fraud.

The SEC is looking for, “Individuals with direct knowledge of the investigation say the SEC is focusing on stock promoters, investment bankers, auditors and law firms that have been active in recruiting Chinese companies to U.S. stock exchanges and raising capital for those companies by selling new shares”

Unlike any other of the recent RTO implosions, DEER actually gives us a group of people who work together as an actual “network”.

It is no secret that Benjamin Wey from New York Global Group is the “mastermind” behind this whole operation.  So it appears to Citron that Wey stacked the deck by putting in his auditor and his Audit Committee Chairman.

Auditor Goldman Kurland & Mohidin, LLP (GKM) and Audit Committee Chairman Arnold Staloff serve several of the same New York Global clients.  GKM audits include Bodisen Biotech (BBCZ, -95% from its high), Agfeed Industries (FEED, -90%), Smartheat (HEAT, -78%) and most recently Cleantech (CTEK.PK, already -52% from its high and delisted from NASDAQ on March 1, 2011 for a serious disclosure violation related to a December financing).

Arnold Staloff, DEER’s audit committee chairman, is also the audit committee chairman of FEED, HEAT, and CTEK.

And speaking of audits and the committee that is supposed to oversee them, …. what does a small audit shop in Encino, California know about auditing a kitchen appliance manufacturer in China?

In a world where legitimate Chinese RTO’s are the outliers, what is to make us think that DEER will not face the same destiny as Bosiden and Cleantech:  DELISTED.

Flashbacks of CCME?

One of the telltale signs of China Media Express doing something “funky” is when the CFO bought $1 million worth of stock, the same day it was “sold” by an insider.  We still do not know whether this transaction took place or was it something that just looked good on paper.  Similarly, it was always odd that management was selling their stock at a significant discount to market, when their business seemingly looked strong.  Citron labels these as “questionable transactions.”  Just like CCME, here is a list of questionable transactions in DEER stock that we believe will eventually be a trail of bread crumbs for regulators.   The following is a list of transactions that do not pass the smell test:

1.       We are supposed to believe the Ben Wey’s sister, Tianyi Wei bought 2.2 million shares (over 6% of the company) in the open market and this transaction has nothing to do with Ben Wey.  It is the belief of Citron that this transaction was not as it appeared to be and the truth will come out eventually (maybe in a CNBC episode of American Greed?)

2.      The transactions of Chairman He Ying are troublesome and just not believable.  We are supposed to believe that even though he owns 8 million shares of DEER, he actually purchased  250,000 shares in the open market, right after Little’s article was published?  That transaction is as nonsensical as the 2010 transaction, when he bought over $10 million of stock on the same day that another officer sold $10 million worth of stock.

Citron believes that there are shady dealings in the stock of DEER which has been evidenced by the trading activity of the stock as well as the insider transactions.  Citron’s opinion is that each of these transactions has an untold story, one which involves papered transactions, and “support” of the open-market stock price of DEER – which amounts to market manipulation.

Threats to Sue Shortsellers

Just a month before its stock was halted, China MediaExpress stated its board has authorized engagement of “outside counsel and other consultants” for advise on countermeasures against the two reports.  (Citron and Muddy Waters)

Similarly, DEER seems to be preoccupied with its threat to “shoot the messenger” – without even a detailed response to the numerous highly detailed concerns raised by published research, as they have already filed suit against Al Little.  Well, DEER, I am a citizen of the United States, and if you choose to sue me, I welcome the opportunity to see you in court and defend my position.



Cautious Investing To All