Former President of Google China claims that “Short-selling companies have gone from exposing fraud to practicing it”.
Dictated by Kai-fu Lee (Founder of Innovation Works, Former President of Google China)
Compiled by Jing Ye, The Founder magazine(ww.iheima.com)
I've been waiting for one day to be able to say something, to do something.
Last year, a number of companies including Focus Media, Spreadtrum, New Oriental encountered short-selling attacks. I can't say that these companies didn't commit any wrongdoings, but their errors were definitely not as serious as the short sellers said. Years ago, there were indeed a number of obviously fraudulent Chinese companies. Attacking them was a duty to society. There is also little reason to criticize short-selling companies for making money. But to now start attacking these companies, who have done nothing wrong, or made only small mistakes -- using exaggeration, falsification, and fabrication -- is too much. Short-selling companies have gone from exposing fraud to practicing it.
Citron's reports on Sohu and Qihoo discuss the search industry, which I understand. After reading the reports, I think they're complete nonsense.
As to short reports, one type of person says, "Flies don't eat un-cracked eggs." Another type says that when short companies say a company's price should fall, it falls, and is happy to be making money. Hence, this type of person supports foreigners in attacking Chinese companies. This made me realize that if you dwell on questioning individual details rather than debating publicly, you won't get results. Especially if you want to make U.S. shareholders aware of the matter, you need to find a larger error that short-sellers have committed and use serious words to draw attention to the matter.
I decided to write a rebuttal article. I wrote the article in English, and the logic was in the American style. Americans are accustomed to speaking with data -- where is the error, how to prove it, what should be correct. After writing the article, I sent it to XueQiu Finance, where Citron has an account. Afterward, I forwarded the article around on Twitter and Sina Weibo, as well as to six investment banking analysts. Several American media outlets reproduced the article. It was enough for Citron to see it. Later, Internet users took the initiative to establish a citronfraud.com website, and many gaming companies came out to refute Citron.
Currently, at least in terms of the search and pinyin business, Citron has admitted that it does not understand the basic products of the companies it investigated.
In doing this, I have been questioned as well. Some think I have purchased Qihoo stock or am a friend of Zhou Hongyi. Citron also questioned whether Qihoo and Innovation Works have a significant association of interests. None of this is true. In so far as I have an interest in this matter, it is that these so-called anti-fraud companies have harmed the reputation of Chinese companies. They have dragged the variable interest entity (VIE) structure and the credibility of Chinese companies lower and lower, causing the market to lose confidence. This indirectly affects all companies that may list on a U.S. stock exchange. The companies we invest in may list abroad in three to five years. If at that time Chinese companies have been disgraced and the VIE structure is dead, we will eventually suffer.
More than 60 domestic investors, entrepreneurs, and I jointly signed an open letter challenging Citron. On September 12, Citron sent a letter saying they would sue us. This is ridiculous. If you’re going to sue, just sue. It's not like we haven't seen others file ridiculous lawsuits.
Conversely, Muddy Waters and Citron attacked fraudulent Chinese companies a few years ago, and now there are rarely fraudulent listings done through reverse mergers. Similarly, if we hit back at short-selling companies writing haphazard reports, few companies will be willing to do so in the future. In the eyes of an optimist, this is a good result.
In an interview with Caixin Media, a Muddy Waters representative stated that China is no longer the company's preferred target. I cannot assume that Muddy Waters' move was related to what we did, but at least short-selling companies have realized that Chinese companies cannot be taken advantage of recklessly. Companies will pay a price for reporting that is not done rigorously. As long as everyone acts in closer accordance with the rules, this issue will come to an end.
Note: Kai-fu Lee vs. Citron
On August 24, Citron issued a long report on Sohu in which it was bearish on Qihoo, saying that Qihoo's gaming average revenue per user (ARPU) and other data were falsified.
On August 27, Lee published "China Short Sellers: Exposing Fraud or Practicing Fraud?" The English-language blog post pointed out a number of errors, including that Qihoo could have search revenue of US$ 98 million in 2013, not "zero" as Citron claimed. Lee also questioned whether Citron's reports were unprofessional or intentional fabrications.
On August 31, Citron responded that Qihoo's ARPU could not be 4 million yuan and wagered 100,000 yuan on the issue.
On September 1, the citronfraud.com website was established. On the website, Lee again published an article challenging Citron.
On September 4, Lee and more than 60 other investors, entrepreneurs, and other business people, signed an open letter criticizing Citron.
On September 12, Citron's lawyer sent a letter demanding that Lee and the other more than 60 Chinese business people apologize.
On September 13, XC.com CEO Huang Yimeng and the CEOs of eight other gaming companies published a joint letter on the Zhihu.com, in which Innovation Works has invested, stating that Qihoo's ARPU was reasonable.