Does anybody remember Andrew Left? I do, and his story should serve as a reminder to everyone who does business with the Chinese Communist Party (CCP) that they are risking everything, especially if they believe in the importance of truth. I believe that truth and transparency are the most essential elements of a functioning economy.
Mr. Left, a hedge fund manager, wrote a scathing 2012 report on the Chinese property giant China Evergrande. Unfortunately for him, the CEO and majority owner of the firm is the oligarch and CCP connected Hui Ya Yan. Although Left’s report truthfully documented the ongoing insolvency and aggressive accounting techniques at the company, Hong Kong authorities pursued a civil suit against him that according to Institutional Investor’s Michelle Celarier “lasted seven years and cost him millions of dollars in legal fees.” * Hong Kong authorities also issued a permanent trading ban against Left and kept reputation-destroying calumnies against him on the internet. China Evergrande filed for bankruptcy protection this past August, once again exonerating Left in the world of truth if not in the strange netherworld of the CCP.
There are two lessons to be derived from this history. The first is that investors should focus on places where the rule of law prevails. American authorities ignored the whistleblower Harry Markopolos when he alerted them to Bernie Madoff’s fraud. They did so for the same reason that the CCP covered for Hui. Madoff was connected, and not in the way we thought of back in Jersey. However, they did not sue Markopolos, attempt to destroy him, or ban him from the industry. Our regulators are generally honest and normally effective. When the truth came out, they shut Madoff down and a process began that tried to make investors as whole as possible.
The second lesson is the importance of short sellers. Somehow, short selling offends the sensibilities of many people, including important members of our government. Without short sellers, there is no financial incentive to uncover what companies might be engaged in deceptive practices or the misrepresentation of long-term prospects. People who buy stocks do so because they believe a company will do well and that its stock will rise in value. Short sellers sell stocks short because they believe that a company’s prospectives are less than expected and that money can be made when a stock’s price declines. There is no significant difference in the research required or the motivation of either investor.
We avoid investing in places without strong institutions that support the open and honest disclosure of material facts. Hopefully, America will always remain the world’s leader in transparent markets. Our future success depends on it.
* Celarier, M. "Andrew Left Was Banned From Trading in Hong Kong for Saying China Evergrande Group Was Insolvent. Was He Right All Along?" The Institutional Investor, Online, August 02, 2021. https://www.institutionalinvestor.com/article/2bswuziii3me2ouem1urk/portfolio/andrew-left-was-banned-from-trading-in-hong-kong-for-saying-china-evergrande-group-was-insolvent-was-he-right-all-along. Accessed 11.07.2023.