An Independent Fraud Investigator's Report Leads to a $6 Billion Decline in Stock Price of US-Listed Chinese Company
An independent fraud researcher used publicly available documents to uncover a potentially multi-billion dollar fraud at NYSE listed firm. Since his report, the company's share price has dropped over 30%.
Los Angeles, August 24, 2015 (Newswire.com) - It’s no question the day of reckoning has come for global equity markets. More than 20% of stocks on the S&P are down by over 10%. But one high-flying US-listed Chinese darling has seen a dramatic decline of over the last few months--Vishop Holdings [NYSE: VIPS]. VIPS peaked at $30 on April 10, 2015 and then continued a marked descent, closing at $17.83 on Friday. Vishop missed out on the appreciation in stock price that many Chinese stocks enjoyed up until June 12, 2015 when Chinese markets peaked.
Some might say that VIPS is falling because all things China have declined, but that would miss an important part of the recent VIPS story. VIPS can point to May 12, 2015, as a catalyst for much of its recent pain. On that day, a previously unknown independent research firm called Mithra Forensic Research issued a scathing report on Seeking Alpha. The report suggested that VIPS was engaging in large scale financial manipulation of various financial accounts. Mithra’s opinion, as detailed in the report, suggested that the company’s shares were worthless.
As I look at my quantitative models, I am seeing a large and growing number of companies using aggressive accounting methods to meet market expectations. The manipulating companies are not just in emerging markets either.
Melvin Glapion, Director of Research
VIPS management issued a modest rebuttal shortly after the initial Mithra report. Mithra then followed up with two updates and has plans to issue a third in the coming weeks. VIPS management has been relatively silent since the first rebuttal, but the company has issued two quarters of financial reports showing dramatic improvements in its operations. Equity research analysts at some of the largest banks have remained steadfastly behind VIPS, with several re-affirming price targets of $30-$35 a share. Nonetheless, the company’s market capitalization has fallen from about $16.2 billion the day before the Mithra report was issued, to $10.4 billion today. It seems investors have either placed greater credence on Mithra’s research or would rather avoid the stock altogether until the red flags are resolved.
So who is the man behind VIPS’ nearly $6 billion drop in market capitalization? Mithra has only recently been unmasked. The person behind the Los Angeles-based firm is Melvin Glapion, a former Managing Director of Kroll, a global risk-consulting firm. Mithra is the name of the street Glapion was raised on in New Orleans. According to Glapion, his work investigating bribery, corruption and fraud at Kroll gave him insights into potential red-flags that investors might not appreciate. He decided to apply the knowledge he gained from investigating corruption and fraud from the inside of corporations and apply it to equities research looking from the outside. “Much of my prior work was helping clients either understand the risks before, or deal with the results after a fraud had happened. I thought what if I could alert investors to fraud while it is happening, possibly limiting the potential damage.”
Glapion started out as an investment banking analyst at Merrill Lynch before heading to Harvard Business School. He has held positions in telecommunications, aerospace and defense and strategy consulting. Mithra Forensic Research is a short-focused research firm, meaning that their recommendations generally advise clients to sell or to ‘short’ stocks. Mithra’s research seeks out companies which it believes are manipulating their financial statements or using aggressive accounting techniques to report better results. When asked about his next targets, Glapion states that he is planning to initiate coverage on another high profile large cap company by the end of September. “I have a large and growing list of sell targets right now. Mithra Forensic Research will be very busy in the coming months.” Financial statement manipulators may not be so pleased.
