China Short Sellers: Exposing Fraud or Practicing Fraud?

Recently, several “China Short Sellers” have developed a scheme to make themselves rich. First, short a US-listed China stock. Then, write a negative report on that company. After the stock drops, cover the short, and pocket a huge profit. This practice itself is already questionable, but what is despicable is how these short sellers take advantage of the information asymmetry between China and the US, and write reports full of holes and lies, knowing that their American readers have no way of verifying them. This paper dissects one such example, Short Seller Citron Research’s report “Qihoo’s entry into search puts SOHU in play” (August 24). This paper will show that Citron lacks even the most basic understanding of the Chinese Internet/Search market, yet it fabricates and distorts information to deceive investors. It is not my intention to support or challenge Citron’s recommendations, but only to expose Citron’s ignorance and deception, and raise the question whether any investor should ever trust them.