Heard Off the Street: FAB saga a replay of other cases

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Word that the law firm hired to investigate allegations against FAB Universal was fortifying its efforts was enough to get FAB bulls chirping on Yahoo's message board -- a four-month trading halt and shareholder lawsuits against the company notwithstanding.

"Shorts are toast ...burnt toast," crowed someone who identified himself as fredgier2002, adding that $38.50 might be a price at which he/she would start selling some shares.

One never knows who these opinionated message board malingerers are and what motivates them to write. But this much is known: fredgier2002's target price is more than 10 times the price tag that investors put on the Pittsburgh-based digital content provider's shares the last time they had a chance to. That was Nov. 21, when the stock closed at $3.07, down $1.10 for the day.

The New York Stock Exchange halted trading in the shares the next day after critics accused FAB of failing to disclose a bond offering and exaggerating the magnitude of its Chinese operations.

The company denied the allegations.

A short time later, the company acknowledged that one of the charges was true. FAB said Dec. 10 it would restate quarterly results to reflect a $16.3 million bond offering that was made by an affiliate and guaranteed by FAB's chairman.

The company also said it discovered "certain deficiencies" with its accounting procedures and that it was hiring an independent third party to investigate. That turned out to be Loeb & Loeb, a law firm that has a practice devoted to representing U.S.-listed Chinese companies in securities matters.

The firm's clients include companies formed the same way FAB Universal was: through a Chinese reverse merger, where a Chinese company goes public by acquiring a company listed on a U.S. exchange. FAB was spawned in 2012 by the merger of Pittsburgh's chronically unprofitable Wizzard Software with Hong Kong-based Digital Entertainment International.

Last week, FAB Universal announced Loeb & Loeb had hired FTI Consulting to assist in its investigation.

FAB Universal spokesman Greg Jakub had no comment Thursday when asked when the investigation might end, when trading might resume, and when the company will disclose 2013 results.

The FAB Universal saga is a replay of other cases involving Chinese companies that have critics, some of whom profit by disclosing information that drives down the price of the company's stock. One of those cases involved FAB's lawyers and the company's critics.

Consider Sino Clean Energy, a Chinese company that produces a fuel made from coal water slurry. Sino Clean sold more than 6 million shares at $5.25 a pop in December 2010. In May 2011, the company sued two critics for publishing false and defamatory statements that drove down the price of the company's stock.

Sino Clean was represented by Loeb & Loeb and the offending statements were made by GeoInvesting, a Skippack, Pa., investment research firm, and Jon Carnes, an avowed short-seller who publishes under the pseudonym of Alfred Little.

In the case of FAB, GeoInvesting revealed that the company had failed to disclose the bond offering. Mr. Carnes accused FAB Universal of selling pirated movies and of exaggerating the number of kiosks it has in China. The kiosks sell movies, music and other digital content.

In its lawsuit, Sino Clean accused GEO and Mr. Carnes of using "innuendo, loaded questions, skewed facts, and outright lies" to portray the company as fraudulent.

The lawsuit against GEO was dismissed in April 2012. In September of the same year, the lawsuit against Mr. Carnes was dismissed.

At about the same time, Nasdaq halted trading of Sino Clean shares. Trading was still halted that December when the exchange delisted the company. Sino Clean now trades over the counter, where true believers can pluck down 13 cents to buy a share.

Meanwhile, Mr. Carnes' reports about another Chinese company have prompted an investigation by the British Columbia Securities Commission.

The regulator has scheduled a November hearing regarding allegations that Mr. Carnes attempted to profit by shorting shares of Silvercorp by writing negative reports about the mining company, then covering his short position after the stock dropped. (Short-sellers borrow shares and sell them. They make money if the stock price drops, allowing them to repay the loan with lower-priced shares.)

"Their allegations are completely false," Mr. Carnes said in a telephone interview.

Just what the truth is about FAB Universal remains to be determined, whether by the company, the courts or the Securities and Exchange Commission, which has received information from Mr. Carnes.

But investors eager to capitalize on China's economic boom by investing in companies created through reverse mergers have had enough heartaches for the SEC to issue a warning on the topic three years ago. The agency has sanctioned several companies, consultants and others who have been involved in the transactions.

No matter how often you tell people to be careful, some just have to figure things out on their own.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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