What the Bank Says vs What the Bank Does


  ** Post-publication afterthought:


To demonstrate just how stupid this is, if this $400 million dollar non-collateralized, personally guaranteed signature loan is to be believed, it is Citron's belief that it would be the largest single unsecured signature loan ever issued by any bank.

Citron challenges anyone to document a larger loan by any bank in any country in the world on similar terms.


   It's official!  Well, sort of ….

Today Harbin Electric (NASDAQ:HRBN) files its latest document in the unfolding soap opera of whether it can complete its private takeover transaction announced last October.

It includes a sizable boilerplate document from China Development Bank purporting to document the extension of a $400 million credit facility that allegedly provides the financing so the Chairman Tianfu Yang can take HRBN private at $24 a share.

While the document appears really impressive, it says almost nothing about security for the transaction.  The entire structure of the loan depends on the personal guarantee of Chairman Tianfu Yang and Ms. Luo Qian. 

Now we know banks in China in the past have been loose with lending.  But a $400 million dollar loan based on a personal guarantee, when they wouldn’t lend more than $50 million (with a huge spiral pledge of stock to collateralize it)  just six months ago? 

We don't think so!  

In China, you can not get a $400 million dollar loan because you know someone.  But you can get a commitment letter for a $400 million dollar loan if you know someone.

   Nice and Simple

If this deal is so simple the Chairman can just finance it with a simple signature loan, why didn't he do it last fall when it was announced?  He didn't need Barings, he didn't need Morgan Stanley, he didn't need Goldman Sachs, and he didn't need Bain.  He didn't need 7 months of deliberations by a "Special Committee".  It would be done by now, and the stockholders would have been delighted.

   Today’s Headlines in China

This week, China’s leading business magazine, Caijing, publishes its cover story on China stock frauds.


 In this article they quote me, Andrew Left, editor or Citron Research, referencing my work uncovering the many frauds among Chinese companies with US stock listings.  You might not be aware that I have been writing on stock fraud for 10 years.  I uncovered my first China stock fraud over 4 years ago (XFML).  Since then I have covered 11 others.  All but 1 are down an average of 80% from the time of first publication.  One is halted, two have been delisted, and one has seen criminal indictment against management — with many more to come, we suspect.


I am just getting warmed up.  Citron is now asking the investing public to think out the story of HRBN for yourself.  See if you come to the same conclusions as regulators, investors, grand juries, and media on the prior opinions of Citron Research.

It is Citron’s opinion that  Harbin Electric is deceiving the public.  If the stock does not get halted for its numerous SEC violations, we believe it is at best a $5 stock.






Oct 12, 2010

HRBN announces a $24/ share buyout by the CEO and Baring Private Equity — with no 8-K filed and no terms attached.

Goldman Sachs Private Equity Asia Group announced as financial advisor to the acquisition vehicle.

Nov 22, 2010

The company borrows $50 million from China Development Bank.  In an odd move, the bank does not securitize the loan with company assets, but rather the Chairman’s stock – 7 million shares — $130 million in stock – for a $50 million dollar loan

Nov 23, 2010

Barings backs out of the proposed management buyout.

 Goldman Sachs’ Private Equity Asia Group role revised to “advisor to Chairman Yang”.

Apr 15, 2011

Phone call between Chairman and William Blair analyst – for which an 8-K was subsequently filed – because Chairman stated he was making a bid for the company the following Monday

No such bid was ever made.

May 10, 2011

Company files 10-Q for Q1 2011, reporting drastically compressed margins and lowered earnings, and reducing guidance.

May 12, 2011

SEC 13D filed, stating the HRBN board received a formal proposal – yet no 8-K was ever filed with the proposal terms.  It is in this 13D that we read about the aforementioned alleged financing, with no documentation of terms of the agreement.


And now today, we get a SC13D, and all it says is that the Chairman proposes to finance this transaction with …… drum roll…..a signature loan! 

Now it is time for everyone to think….simple common sense…the same common sense that has guided Citron's reporting to be one of the premier destinations for finding information about deceptive China stocks.


At first we thought the financing was coming from Baring, but it took them less than a month to back away.  The company then said they are working with Goldman Sachs, who undoubtedly has access to capital at the snap of a finger for a legitimate LBO, but nothing happens there.  And here is what we hang our hat on.


The alleged financing is now a commitment letter for $400 million from China Development Bank, the same bank which lent Chairman Yang $50 millon in November.  Yet, this existing loan was not made with the company, rather its proceeds purportedly go to Chairman Yang’s company, Tech Full, based in the Cayman Islands and recently domiciled in Nevada.  It is no more than a holding company that holds stock. 

And now this new loan, 8 times the size,  is supposedly based only on his personal guarantee plus Ms. Luo Qian?


So let us see what has changed between the first financing and the second (alleged) with the SAME BANK.


  • China stock fraud has moved from the blogosphere to front page of WSJ and mainstream China and Hong Kong press.
  • Over 20 Chinese RTO’s have been halted and/or delisted and only a few have reopened.  Therefore anyone with loans outstanding collateralized by shares in any of these stocks is up the Yangtze River without a paddle.
  • HRBN’s auditor has been disbanded after being charged with fraud by the SEC.
  • The chairman of HRBN’s audit committee (and also the chairman of the “Special Committee” overseeing this deal) has been sued for a fraudulent transfer by the bankruptcy trustee of his former employer.
  • The company has reported lower earnings with negative cash flow.
  • It has come to the attention of the investing world that HRBN’s SAIC documents show substantial liabilities never reported by its auditors in its SEC filings.
  • Baring Private Equity walked away from financing the deal
  • The mighty Goldman Sachs was not able to find financing for the deal

So the company is back to square one – with the bank who lent them $50 million in November. 

Now let’s assume for a moment that China Development Bank does not have internet and does not know how to read the news in English or Chinese  and now has no idea of how sentiment towards Chinese stocks has changed in the intervening months.  Let’s say they decide to stick to the same terms as the original deal…

On the same ratio of his currently outstanding $50 million loan, Chairman Yang would be responsible for posting over $1 billion in liquid marketable collateral to borrow $400 million.  So unless he owns an NFL team or the Mona Lisa ….how in the world would China Development lend $400 million to a Cayman Island Company with no assets or collateral? 


Mind you, that is under the best of conditions.


In most LBO’s you cannot use stock as collateral.  More importantly, the bank has already made it clear that they have no interest in the assets of the company as collateral.


The bank is not in the business of making bad loans…look at the hard-line deal they cut with HRBN last November under circumstances far better than now.  If you believe that the bank will lend $400 million to a Cayman Islands company to buy another company that they wouldn’t fund for $50 million in better times, then I have a large wall to sell you North of Beijing. 

   What Keeps a Banker Up at Night?

 There is an old adage: when you owe the bank $1 million, you lose sleep.  But when you owe the bank $50 million, then the banker loses sleep.  With the amount of Chinese RTO’s that have just ceased trading altogether, no amount of collateral of shares and Ambien can make this banker sleep at night.   If this stock gets halted or breaks below a certain price on a hard core investigation … the bank could wipe out its profits on billions of dollars of good loans with one $50 million write-off.

By the way, as a funny footnote, China Development bank was actually a client of Longtop Financial, which is still halted. 


What makes this whole sideshow interesting is it seems that the company is doing everything in its power to keep the stock price up…in the initial loan agreement the bank made it clear that if they believed their $50 million loan was in peril, they would sell stock and keep selling even if it means they need more than the pledged 7 million shares.  It is the belief of Citron that HRBN is a struggling company doing whatever they have to do in order to keep that share price high enough.  Like the game of musical chairs, when the music stops will the bank have a seat?


  The Risks of Regulatory Attention

Further, Citron suggests the SEC and the NASD are already having a hard look at the practice of announcing "private buyout" deals that lack material basis.  Numerous currently halted China stocks are the subject of bogus takeover announcements right now. 


Don’t forget that after Chairman Yang gives you his wink-wink nod-nod at the social clubs throughout Harbin or on phone calls with analysts — use your common sense.  If you do not, you might end up on the wrong side of the trade like the many other Citron detractors of the past.


Cautious investing to all.