Short-sellers who profit from stock price declines have resumed targeting Chinese companies after a three-year lull, but many of the researchers who instigate the strategy are now cloaked in anonymity, shielding themselves from angry companies and Beijing's counter-investigations.
Three reports published this month separately accused three Chinese companies - Tianhe Chemicals, 21Vianet and Shenguan Holdings - of business or accounting fraud. All three companies said the allegations were baseless but their shares were hit by a wave of short-selling by clients of the research firms and then by other investors as the reports were made public.
The reports were written by research firms that did not publicly disclose names of research analysts or even a phone number.
In the last wave of short-selling that peaked in 2011 and wiped more than $21 billion off the market value of Chinese companies listed in the United States, the researchers advocating short-selling were mostly public.
Carson Block of Muddy Waters, one of the most prominent short sellers, openly accused several Chinese companies of accounting fraud. Block said in 2012, according to several media reports, that he moved to California from Hong Kong because he had received death threats.
"If you have researchers who are based in China, it makes sense to operate anonymously because some of the mainland Chinese companies have a history now of retaliating against people who do negative research," said short-seller Jon Carnes in an interview with Reuters.
Carnes's research firm Alfred Little has the best track record among short sellers, according to data compiled by Activists Shorts Research that shows the share performances of companies it targeted.
Carnes has said he was threatened by representatives of one of the companies he reported on in 2011. His researcher Kun Huang was jailed in China for two years and then deported.
Kun, a Chinese-born Canadian, told the New York Times after returning to Vancouver this year that he was charged with criminal behavior and convicted in a one-day private trial.
A series of incidents in recent years has highlighted China's growing willingness to investigate, detain and prosecute people for crimes involving the use of information for commercial purposes. Short-selling has particularly irritated the authorities, financial industry analysts have said.
In 2012, China's state news agency Xinhua described the short-selling reports as malicious and aimed only at making quick money. In an editorial, the agency said short-sellers did find genuine problems at some companies but that they later unfairly targeted quality Chinese firms.
Now, research firms are becoming more adept at using online tools to mask their locations and identities, said John Hempton, an Australia-based short seller at Bronte Capital.
"It's getting more anonymous, because the attitude of the Chinese authorities is becoming more and more dangerous," said Hempton.
The Tianhe attack
This month's round of short-selling began with the publication of a report by Anonymous Analytics, which describes itself as a "faction" of the hacker group Anonymous, against Hong Kong-listed Chinese company Tianhe Chemicals Group. .
Anonymous Analytics said Tianhe "vastly misrepresented the size and scope of its business, and has produced false and misleading statements to the market." The research group said its findings were based on "months of due diligence, field research and analysis". It said the analysis included government and State Administration for Industry and Commerce (SAIC) documents, and that it also conducted interviews with clients, competitors and former employees of Tianhe.
Tianhe said in a statement it "unequivocally denies and vigorously refutes the groundless allegations in the report" while Hong Kong stock exchange authorities, contacted by Reuters, refused comment.
Tianhe requested that its shares be halted from trading on Sept 2, the day after the Anonymous report.
The same day, another research group, Emerson Analytics, accused Hong Kong-listed sausage casing maker Shenguan Holdings Group of doctoring its books, and said its report was based on government and SAIC documents, company filings, and an analysis of the casing industry.
"In 2013, Shenguan inflated its revenue by at least 10-15 percent and hid part of its raw materials costs (the actual cost is about 124 percent higher than the reported amount). This bloated its (earnings) margins from our estimated 19.8 percent to a reported 52.4 percent," Emerson said.
Shenguan said in a statement that the report contained errors and misleading statements.
The company also requested a halt in trading of its shares.
On Sept. 10, Trinity Research Group published a report on Nasdaq-listed Chinese data center company 21Vianet Group saying it had "overwhelming evidence that the company is committing accounting and securities fraud". It said the report was based on a six-month investigation by a team of accountants, lawyers, telecom industry executives and insiders, as well as former employees, current and former customers and current and former service providers of the company.
In a public statement and in a letter to shareholders from its CEO, 21Vianet called the report malicious and baseless. Its shares fell as much as 35 percent before recovering slightly after the company statement.
None of the research reports listed contact names or telephone numbers - only e-mail addresses. The groups declined to disclose their location or give other details when contacted by Reuters.
In the previous short-selling wave, several Chinese firms were delisted as their share values sank at the cost of billions of dollars in destroyed investor capital.
But the very success of the shorting campaign also hastened its end: Chinese stocks began underperforming their respective peers, while the cost of borrowing shares to short skyrocketed, cutting into profit margins.
At the same time Chinese law enforcement began moving against the due diligence investigators on whom shorters relied to dig up dirt on Chinese firms.
The recent short-selling shows these traders have discovered a new way to take on Chinese companies, relying on anonymity, public information, and less upfront costs, allowing them to profit more quickly and more safely than before, according to China-based short sellers who declined to be named.
"The incentive structures are such that you're going to see a lot of frauds (among Chinese companies), and a lot of takedowns," said Hempton at Bronte Capital. "This will be a feature of Chinese capital markets until those incentives change."