SinoCoking (NASDAQ:SCOK) Follow the Money!

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It is no surprise that Citron Research is not a big fan of Rodman & Renshaw. A few years back Citron had an epic battle with Rodman when  they placed a stong buy recommendation on a company called Home Solutions of America (NASDAQ:HSOA) that Citron called a complete fraud.

Flash forward a few years later and Home Solutions is now delisted —  yes, trading at 0.0006,  Its officers were indicted for accounting fraud, exactly as Citron reported. . 

http://www.sec.gov/litigation/litreleases/2009/lr21314.htm

Here You Go

Now they’re back with a new girl — an ugly duckling Chinese coal deal with an utterly improbably rise and ridiculously unsustainable run-up on the premise that $6 PIPE investors (plus warrants at $12) with a six-month lockup have a bought “great deal”.  It’s like a horse race with a donkey where the donkey is started with a one-lap lead.

Citron finds it inconceivable that Rodman isn’t required to do a little more due diligence on these things, and suggests that readers do what Rodman doesn’t:  follow the money. 
“SinoCoking’s President, Chief Executive Officer and Chairman, Mr. Jianhua Lv, does not hold any shares of Top Favour, however, Mr. Lv has the right to potentially acquire up to 51% of Top Favour. On July 6, 2009, Mr. Jianhua Lv transferred his shares of Top Favour to Honour Express Limited, a British Virgin Islands international business company which is solely owned by Mr. Shaohua Tan, a Singapore citizen. As a result of the share issuance and share transfer, Top Favour (BVI) has 10,000 ordinary shares outstanding, 51% of which is held by Honour Express Limited.”

Meet the Puppetmaster

Mr. Shaohua Tan appears to be a penny stock jockey with filings in GHII, JGBO. and LTUS.  He operates BVI holding companies out of Singapore with names like “Top Favour” and “Honour Express”. 

Looking at filings to try to gain a sense of his track record, we find:

JGBO : a thinly traded  Chinese pharma covered only by Brean Murray and Dutton (paid-for coverage),
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=jgbo&sid=0&o_symb=jgbo&freq=2&time=13

LTUS is a $1 Chinese pharma company,
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ghii&sid=0&o_symb=ghii&freq=2&time=12

and GHII is a .12c OTCBB Chinese design-build company

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=LTUS&sid=0&o_symb=LTUS&freq=2&time=13&x=0&y=0

Then there’s BOPH, purportedly a Chinese pharmaceutical, “quote unavailable”…

Tan was appointed Director and “Leader” of Genesis Technology Group (OTCBB:GTEC)  in 2005 which was rolled into JGBO (NOTE: It is NOT the current NASDAQ:GTEC.)

http://findarticles.com/p/articles/mi_pwwi/is_200502/ai_n9778301/

Despite years of wild promises of future wealth from international deals, Citron notes that the most tangible outcome of all this furious burst of business is ….. a lawsuit.

Further, Mr. Tan is reportedly the operator of Genesis Equity Partners, LLP which was organized, according to announcements filed by a plaintiff attorney,

” In 2006, Genesis Technology Group, Inc. (GTEC), China West, LLC and Joshua Tan, a director of Genesis, formed GENESIS EQUITY PARTNERS LLC (GEP), a Florida limited liability company, for the purpose of completing private-to- public reverse merger programs for Chinese companies. GTEC owned 51%, China West owned 25% and Tan owned 24% of GEP.”

He’s now the subject of at least $13 million in arbitration claims for failing to close and deliver on equity transactions, and for diluting its partners by 500% share issuance.

The plaintiff?  Capital Research Group which operates stock tout-for-free-shares site TheSubway.com !!!  Yes the ones who were charged for fraud by the SEC

http://www.sec.gov/litigation/litreleases/lr18286.htm
http://findarticles.com/p/articles/mi_pwwi/is_200809/ai_n28121655/
http://www.prnewswire.com/news-releases/china-west-llc–china-west-ii-llc-arbitrations-against-genesis-pharmaceuticals-now-total-135-million-65438452.html

You Own What?

What is undisclosed is the real terms by which Mr. Tan and Mr. Lv acquired their interest in these Chinese coking plants, which is only disclosed to be in the form of “contracts” stated above. 
From recent filings, we see :

The following excerpts taken from filings describe the twisted relationships that give rise to the ownership in these Chinese assets.

“Top Favour’s relationships with Hongli Group and its owners are governed by a series of contractual arrangements, through which Top Favour holds and exercises ownership and management rights over the Hongli Group.  Neither Top Favour nor Hongyuan owns any direct equity interest in Hongli Group.  According to a legal opinion issued by PRC counsel to SinoCoking, the contractual arrangements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC.”

“Pursuant to the operating agreement, Hongyuan provides guidance and instructions on each Hongli Group company’s daily operations, financial management and employment issues.  In addition, Hongyuan agrees to guarantee the performance of each Hongli Group company under any agreements or arrangements relating to its business arrangements with any third party.  In return, the owners of Hongli Group must designate Hongyuan’s candidates as their representatives on each Hongli Group company’s board of directors, and Hongyuan has the right to appoint senior executives of each Hongli Group company.  Additionally, each Hongli Group company agrees to pledge its accounts receivable and all of its assets to Hongyuan. “

“Under the equity pledge agreement, the owners of Hongli Group pledged all of their equity interests in Hongli Group to Hongyuan to guarantee each Hongli Group company’s performance of its obligations under the consulting services agreement.  If a Hongli Group company or the owners breach their respective contractual obligations, Hongyuan, as pledgee, will be entitled to certain rights, including, but not limited to, the right to vote with, control and sell the pledged equity interests.  The owners of Hongli Group also agreed that upon occurrence of any event of default, Hongyuan shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the owners to carry out the security provisions of the equity pledge agreement, and take any action and execute any instrument as required by Hongyuan to accomplish the purposes of the agreement.  The owners of Hongli Group agreed not to dispose of the pledged equity interests or take any actions that would prejudice Hongyuan’s interest.  This agreement will expire two years from the fulfillment of Hongli Group’s obligations under the consulting services agreement.”

http://www.sec.gov/Archives/edgar/data/1099290/000141188609000049/defin14a.htm

To which Citron observes, if (and when) something goes wrong, and investors seek legal recourse with regard to the actual profitmaking hard assets  … GOOD LUCK!

The Old Shell Game

And of course, our favorite:

“SinoCoking’s management decided that it was in SinoCoking’s best interest to become a publicly traded company in the U.S. to better position the company to raise capital from outside sources. “

This disclosure, made with a straight face, in the wake of record financing amounts flowing like rivers out of Chinese banks the last year or two to support every conceivable venture needing capital … but somehow accessing the US capital markets by reverse merger “better positions the company to raise capital from outside sources.” 

Conclusion

Sharesleuth.com correctly points out that investors should heed a red flag when any company, especially one in a heavily commoditized industry, and extra-especially if its Chinese based, projects gross margins that are out of line with all its competitors.

Add to that an incomprehensible shell ownership structure, threaded through privacy and tax havens, and you’ve got a recipe for a predictable outcome.

Cautious investing to all.