Citron Reports On Xinhua Finance Media


Xinhua Finance Media….Notes From a Scandal

It has been an “interesting” week for Xinhua Finance Media (NASDAQ:XFML). The fortunes of this newly public so-called “Chinese media” company have taken an interesting turn.  In what looks to be a page out of the Refco debacle, someone should have done their due diligence before taking this company public. 

The recent controversy surrounds Shelly Singhal, former director of parent company Xinhua Finance and who appears to be the puppetmaster of Xinhua Finance Media (XFML).  Singhal owns over 5 million shares of XFML and millions of warrants.

On Tuesday May 15, Singhal resigned as CFO of XFML and became the director of corporate development.
Then, Friday night May 18, XFML announces that Singhal:

“has resigned from the boards of both companies [Xinhua Finance and Xinhua Finance Media] as well as from all executive and managerial positions”.

On May 19, Barron’s publishes an article on the lack of financial controls at Xinhua and the history of dubious stock dealings of Shelly Singhal.

(for subscribers) :

or  here:

So now are we to believe Shelly Singhal, who architected this deal from top to bottom and whose related party transactions are laced throughout it, is magically vanished?  And besides Bedrock Securities, is there anything else about Shelly that shareholders should know?  Let us start with a list of some of the stocks he has been associated with:        

48 cents
56 cents
24 cents
29 cents
.0042 cents
47 cents
.0130 cents
58 cents
15 cents
.05 cents
.09 cents

In addition to these, the Barron’s article mentions Singhal’s involvement with two major stock frauds:  Aremisoft and ACLN. Yet, we must not forget that Mr. Singhal was also a director of Chell Group, whose  Chairman ended up being nabbed in a “boiler room” raid.
As mentioned in the Barron’s article, Singhal is being sued under a civil RICO case in the state of California.  In yet another blotch in a questionable career, court documents state that Singhal claims he took stock from a shareholder in yet another penny stock public company but never paid for it because he was being threatened by the “Chinese Mafia”.  Below is a copy of the case:

But the most interesting of Shelly Singhal’s affiliations (besides iMergent) is the one he had with Stonepath Group.   Singhal has had documented associations with Stonepath since 2005. Stonepath is a logistics company who was just forced into involuntary bankruptcy on May 8, 2007. This is just weeks after they received a delisting notice from the AMEX.  This history of Stonepath is long and dirty, with more skeletons than a haunted house…but here is what is interesting….many of the former board members of Stonepath have found themselves involved in Xinhua Finance Media.

Shelly Singhal’s partner in Xinhua is Dennis Pelino, former Chairman and CEO of Stonepath. Mr. Pelino is also the owner of over 5 million shares of XFMN and millions of warrants.
The two “independent” directors of Xinhua are Aloysius Lawn and John Springer, both former directors of Stonepath.  It is the opinion of Citron that the influence of Singhal is far from over in Xinhua. Not only is the current CFO his former employee at suspended brokerage firm Bedrock, but he has deep ties into the directors, including the independent directors.

OK, so what about the Business?
But, just to be fair to the numbers behind the people, we will discuss the business of Xinhua Finance Media.  It appears to Citron that Xinhua is a conventional advertising agency in China – it buys and resells airtime and print media along with creating advertising campaigns.  On April 30, the company reported the first quarter numbers that lacked any form of transparency.  This should not be a surprise as Singhal was the CFO and as the company stated in their own disclosures:

“The significant control deficiencies identified by us included, among others: (i) the lack of sufficient financial reporting and accounting personnel to fulfill the post-offering U.S. GAAP reporting requirements; and (ii) the lack of a comprehensive accounting policies and procedures manual to communicate to accounting and finance personnel to ensure the consistent application of U.S. GAAP”

Well, the first quarter seemed like a blowout as the company reported a first quarter net profit of $12.6 million, which they proclaimed to be “robust”.

But hold on….they also recorded a one time tax benefit of $12.9 million and interest income of $456k…so much for the operating profit.  And that’s before you get to the disturbing and questionable stuff.  Xinhua booked $2.261m in “other operating income” This line does not have a description and was not in their financials at all during the same period 2006.

The largest line item in the company’s income statement is dedicated to advertising services, which comprised 75% of total revenues.  Advertising services is not selling of advertising as we see in the business model but rather it is “consulting advisory services”. WHAT IS THAT?  Citron will expose this line item in future reports.

It is the opinion of Citron that we have just scratched the surface in the dirty dealings of Xinhua Finance Media. The deep relationships of Shelly Singhal to the company are telling but it does not end there.  In future reports, Citron will expose how exactly Singhal received his stock and how the company has created a daisy chain of revenues of highly questionable value.

Until then, cautious investing to all, and may you be spared investing in “interesting” IPO’s.  ….especially when dealing with “Chinese” companies whose senior executives work out of Newport Beach, California.       Š