The Similarities Between Madoff and Harbin Electric


This past week, a new film documentary premiered entitled “Chasing Madoff”.

It chronicles now famed whistleblower Harry Markopolos, whose longstanding battle to get the SEC to take action against the massive Ponzi scheme perpetrated by Madoff & Co. had been documented for years. 

To this day, Markopolos’s letter to the SEC in 2005 (which wasn’t his first, his first formal complaint to the SEC was made in early 2000), remains a classic in common sense insight for investors.  Citron believes it should be required reading for every market participant, legislator and regulator.

After recently re-reading “No One Would Listen”, this writer couldn’t help but see the similarities between Madoff and Harbin Electric.  Before you dismiss this as a stretch … consider a few points.

   Similarities between Madoff and Harbin: 


1)  Off-the-charts financial results that defy independent verification

Madoff reported earning 12% or more almost every year, while never disclosing how he did it.

Harbin has doubled revenue each of the last two years, to a run rate of over $500 million per year, meanwhile claiming net margins besting peer competitors by orders of magnitude.  Yet it does not disclose a single verifiable large customer or large scale order with a verifiable counterparty. Its major customers from prior years’ filings state little or no business conducted with Harbin.

2)  Investors who know something fishy is going on, but stay involved

Many of Madoff’s investors suspected he was doing something “wrong” (i.e. frontrunning orders), but invested anyway, because they figured he was on their side — as long as they could profit from his cheating, then cheating was OK.

Harbin investors have submitted hundreds of emails to Citron.  But not a single one has ever credibly defended the company’s business.  Instead, they all assert the theme of “who cares if there is a business or not….we are getting taken over.”

3)  Investors focus on credentials and not business

Madoff derived credibility because he was Chairman of the Board of Directors and a member of Board of Governors of the NASD.

Harbin’s Chairman Tianfu Yang derives credibility because he is a Deputy in the National People’s Congress.

4)  Professional Industry counterparties keep their distance

Many qualified market participants concluded Madoff was a fraud.  But while Madoff's wealth management business grew into a multi-billion-dollar operation, none of the major derivatives firms would trade with him because they concluded his numbers and his strategy were fictional.

Even though Harbin Electric has engaged numerous experts in its going-private process, the major firm analysts are all mute, large firm arb desks aren’t taking the “easy money” bait, and short-sellers can’t even short the stock because the borrow is so tight, all while the stock trades at 2/3rds of the takeout price. 

5)  Family members in key positions of trust

Madoff’s right hand man was his brother Peter Madoff who served as Chief Compliance Officer for 20 years.

Tianfu Yang’s right hand man is his brother Tianli Yang, who is Vice President of Harbin Electric and a director of subsidiaries.

6)  The low credibility auditor

Despite being surrounded by white shoe pedigree peers, Madoff’s auditor was Friehling & Horowitz, a little known accounting firm that has since been sued and put out of business.

Despite its going private documents festooned with pedigree white shoe names (every one of which explicitly disclaims any actual due diligence), Harbin’s auditors are Frazer Frost, a now disbanded and disgraced auditing firm which has been sued by the SEC and whose client list is the poster child for China stock fraud.

7)  Constantly raising expensive money despite claiming wildly profitable operations

Madoff continued to pay large acquisition fees to feeder funds, despite a business that purported to be massively profitable. 

Harbin’s Chairman Yang had to pledge the majority of his stock for an expensive $50 million loan.  The company also is indebted to a patchwork of banks, pledging various assets, while the company claims nearly $100 million in cash on the balance sheet, and hugely profitable operations, that never relieves its insatiable needs for cash.

   …But … One Major Difference


When Madoff’s fraud was finally exposed, there were consequences … serious consequences, as in a 150 year jail term, and asset seizure.

Citron believes the Harbin Electric deal is likely to “fall apart” at the last minute due to unexplained circumstances, which will likely be conveniently blamed on “regulators” and “short sellers”. 

But when it goes south, nobody at Harbin will be accountable, either legally or financially.  The utter lack of civil or criminal jurisdiction over the principals in China assures that shareholders will have zero recourse. 

Although there have been dozens of China RTO frauds exposed, not one penny has been recovered for shareholders by legal action, and not a single indictment of a culpable party has been executed.


Citron alerts investors that, as currently structured, and absent regulatory intervention, this purported buyout can proceed all the way to the altar with not a single dollar escrowed to protect investors from being jilted at the last minute. 

The impressive-sounding white shoe names on the documents have all indemnified themselves with broad disclaimers.

For those following the case of CHBT, a China RTO fraud stock tracked by Citron for nearly a year, the real liquidity only poured into the stock in the final weeks immediately prior to the deadline for its audited annual report.

The entire Harbin take-private transaction depends on massive bank financing from one of China’s state financing agencies, an entity which customarily underwrites massive infrastructure development projects for widespread social benefit, not leveraged private equity deals to profit selected Hong Kong fund operators.  It remains utterly unclear how far this bank will deviate from their clearly stated policies of state and social interest to underwrite this dubious transaction.

Investors need look no further than the recent cases of Sino Forest and Longtop, whose stocks had no floor when the music stopped.  Billions in investor assets simply disappeared into the mists.


Cautious investing to all.