Stock News!!

Deer Consumer Products Shares Halted After Factories Idled

2012-08-14T11:26:00.001-07:00

Yesterday, August 13, 2012, the Nasdaq halted trading in Deer Consumer Products (DEER) until the company has "fully satisfied Nasdaq's request for additional information." I applaud the Nasdaq's decision, coming over a year after I first questioned DEER here, here, and here. In today's report, I will show the likely reason DEER was finally halted.

Background

Deer Consumer Products has reported spectacular growth in sales from its Chinese domestic kitchen appliance manufacturing business each of the last four quarters, as well as reiterated truly stunning 2012 sales guidance, as shown in the following table:

Click to enlarge

Unfortunately for investors, DEER's miraculous growth is completely contradicted by the simple fact that its two exclusive manufacturing facilities in Yangjiang (appearing adjacent to each other outlined in yellow in the picture below) are completely idle.

Most recently, on August 3, 2012, I had an independent third-party investigator visit DEER's two Yangjiang factories. He noted that there was no sign of any production activities or workers other than security and maintenance personnel.

Two photos from his visit appear below.

The glaring questions are now:

1) How long ago were DEER's factories shut down?

2) Why were they shut down if manufacturing kitchen appliances is as profitable as DEER claims?

3) Why was there no 8-K disclosing the factories were shut down?

4) How many historical 10-Qs and 10-Ks need restatement?

Some clues can be found in DEER's SEC filings. Consider DEER's reported headcount at year-end reported in its 10-K filings and reflected in the following table:

According to its 2011 10-K, at 12/31/11, DEER had only 437 employees (excluding sales and marketing staff), a decline of 78% from the prior year, despite a 29% increase in revenue. This contradicts the growth and earnings continuously reported by DEER and touted by Benjamin Wey of New York Global Group as the "world's largest producer of blenders and juicers."

Likewise, DEER's reported employee welfare expenses reported in its 10-Qs have fallen to almost nothing in recent quarters, hardly indicative of a growing world-class company as shown in the following table:

Conclusion

Unable to disprove the evidence against the company, for over one year DEER has attempted to shield itself from my allegations by filing frivolous and abusive defamation suits to silence me. DEER's failed approach, like that of Sino Clean Energy (SCEI), will surely end in delisting.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The Two Faces of Nu Skin

2012-08-07T07:45:00.001-07:00

Posted in Citron Reports by Stocklemon on the August 7th, 2012

stock ticker: NUS

Over the past 5 years Citron has written about numerous Chinese companies who were being less than forthright in their disclosures in the U.S. markets. But we now turn the tables — exposing a U.S. domiciled company that is being far less than honest about its operations in China – defying Chinese government regulation while exploiting an ambitious population eager for a formula to climb the economic ladder.

Introducing Nu Skin (NYSE:NUS)

In the United States, multi-level marketing (MLM) has become part of our economic fabric. It is not our proudest achievement, but nonetheless it has become a part of our society – one that sells dreams along with an array of overpriced products that most people can live without just fine. The U. S. has established a patchwork of little understood regulations that provide some protection for the public from the most abusive forms of pyramid schemes, mostly under the jurisdiction of the U.S. Federal Trade Commission. ( See “Lotions and Potions” at the FTC website. http://www.sec.gov/answers/pyramid.htm (The SEC also has both concerns and regulatory oversight in this problematic area: http://www.sec.gov/answers/pyramid.htm )

By contrast, China prohibits multi-level marketing strictly and in entirety. Pyramid schemes create victims by creating an endless chain of recruits who recruit new recruits into a wealth transfer scheme which cannot possibly be sustained. Therefore the vast majority of the participants lose their money. Often pyramid schemes are cloaked in the sale of an overpriced product, with new recruits being required to “invest in inventory” to gain or maintain certain levels of membership which most will be unable to achieve. These abusive business models are understandably outlawed under Chinese law.

China does have a law which defines and permits only “direct selling”. Much like many Chinese companies which ignored the regulatory laws of the United States, it is the opinion of Citron Research that Nu Skin is grossly violating the laws of the PRC, and their entire Chinese business operation could be in jeopardy of seizure and other substantial risks.

Before we introduce the evidence pointing conclusively to widespread violation of Chinese law, this discussion begins with the importance of the China market to Nu Skin. The company was beset by challenges from various U. S. regulators in the early 1990’s, when several states were investigating the company for everything from misleading sales practices to operating a pyramid scheme. Nu Skin realized that their future riches were not on these shores, but rather overseas, and particularly in China.

Greater China comprised almost 75% of Nu Skin's year-over-year revenue growth in Q2.
Greater China represented less than 10% of the company’s revenue just 3 years ago, and is now 33.6%.
The average distributor in greater China purchased roughly $1,200 worth of product in Q2, almost triple that of the U.S. and double the average levels of prior periods in China.
The future of the company, and in particular, the growth story that underpins the value of its stock, is dependent on China. As CEO Truman Hunt just stated "Emerging markets, particularly China and South Asia, will continue to drive healthy overall growth rates…"
Sales in North and South America contributed just 12 percent of revenue in the last quarter, with Europe just 7.7%.

So the Chinese operation is contributing very materially to the company’s overall financial results, particularly in shoring up its flagging growth in other regions. (Details provided below.)

With the U.S. Consumer becoming increasingly resistant to the core business of Nu Skin, they just moved their entire dog and pony show to China … but is it legal?

Here is what Nu Skin says it does. In its most recent 10-Q, Nu Skin describes its business operations as:

“The Company operates in a single operating segment by selling products to a global network of independent distributors that operates in a seamless manner from market to market, except for its operations in Mainland China. In Mainland China the Company utilizes an employed sales force, contractual sales promoters and direct sellers to sell its products through fixed retail locations.”

This disclosure language is extremely significant. Nu Skin acknowledges that their operations in China are a separate and distinct exception – obviously they cannot operate in China the same way they operate everywhere else in the world.

Why? Because China has strict laws regulating direct selling as well as a strict and clear and total prohibition on multi-level marketing.

Nu Skin’s disclosures go further. They state:

“Our operations in China are subject to significant government scrutiny, and we could be subject to fines or other penalties if our employees or direct sellers engage in activities that violate applicable laws and regulations. The legal system in China provides governmental authorities with broad latitude to conduct investigations. We anticipate that our business will continue to attract significant governmental scrutiny, particularly as our business grows and the number of sales employees and contractual sales promoters continues to increase.”

The risk here is for U. S. investors to regard the above warning as “just boilerplate”. Citron believes that readers will understand the above-described looming threat in a completely new light after reviewing the evidence presented in this report.

What Nu Skin Says they Do: Direct Selling

http://www.asianlii.org/cn/legis/cen/laws/rodsa433/

Nu Skin obtained its business licenses and established its presence in China by having agreed to operate under the “Regulations on Direct Selling Administration”, essentially promising to do business as “a direct sales organization”.

The direct selling law (linked above) is quite clear – it was structured to address a business model in which a company could legally engage direct sales staff (note all the law’s 60+ explicit references to “door-to-door salesmen”) who were expected to sell products directly to consumers — a simple and well-understood model, if somewhat dated by Western standards, that might boost employment and create a channel for the distribution of goods to consumers.

This is a humble and straightforward business model that is certainly not founded on the promise of making millionaires. However, note that this law, in article 27, it makes the company, not simply the salesmen, liable for violations.

It is Citron’s opinion that the most fundamental point of this report is that Nu Skin’s management used the promise of conducting the direct sales model to gain the permission of Chinese authorities to grant it business licensing, then pulled a classic bait-and-switch maneuver, and is actually implementing a pyramid sales scheme on a grand scale.

What Nu Skin Actually Does: Pyramid Selling

http://www.asianlii.org/cn/legis/cen/laws/ropops432/

Citron believes Article 2 of the Chinese Pyramid Sales law is utterly clear in stating its intent and it is unambiguously strict in its implementation:

“The term "pyramid selling" as mentioned in this Regulation refers to such an act whereby an organizer or operator seeks for unlawful interests, disturbs the economic order and affects the social stability by recruiting persons, calculating and paying remunerations to recruiters on the basis of the number of persons a recruiter has directly or indirectly recruited or the sales performance, or asking the recruiters to pay a certain fee for obtaining the qualification for participation.”

And lest you think that Hong Kong (where the majority of Nu Skin's China revenue is being reported) , look at the new Pyramid Schemes Prohibition Ordinance, intended to close loopholes in the former law and toughen penalties, just put into effect this year:

http://www.deacons.com.hk/eng/knowledge/knowledge_457.htm

The question is simple: Does Nu Skin operate an MLM in China?

Yes Or No

It’s a simple question because the answer is just “Yes” or “No”.

Citron will now present evidence uncovered that confirms that Nu Skin is in fact operating as an MLM — in multiple cities. Citron associates engaged some undercover “customers” who helped us expose the truth. While Nu Skin is a registered direct seller, we believe they violate laws regulating direct selling, as well as the prohibition on pyramid sales, specifically by supporting the creation of a multi-level pyramid compensation scheme, as well as requiring purchases in order to participate in sales commissions or salary. Over the course of three weeks leading up to the company’s recently held sales convention, a representative of Citron met with numerous Nu Skin salespeople. They consistently presented a completely different compensation model than that is not written in any of the company’s literature. Thus the hand-drawn sketches.

All of the conversations we are presenting have been taped and uploaded to a dropbox. The purpose of these is to validate the translations of these interchanges posted with this report.

Evidence Point #1: On June 19 a Citron researcher met with sales representative Li Shanshan from Nu Skin in Hefei (a city of 5.7 million population). Below is a synopsis of the meeting. All highlighting has been added by Citron to indicate content demonstrating a blatant violation of direct selling principles and the offering of a pyramid MLM compensation scheme. Even though this interview is presented out of sequence, we start with this one because the representative from Nu Skin actually drew a pyramid to use in her explanation of Nu Skin’s compensation scheme.

2012-06-19 Report of NUS Visit, Hefei, (has recording in audio file)

Here is another transcribed conversation from the same day. Violations are again highlighted.

2012-06-19 NUS Recording Transcription, payment system

These conversastions are from visits which are follow-up from the June 6 visit in which the salesperson says whatever they seem to need to promise unlimited riches for the new recruit to join the pyramid. Just read the attachment and follow the multiple violations.

2012-06-06 NUS Recording TRANSCRIPTION

Here are the notes from a another recorded conversation at the Nu Skin office in Hefei.

2012-05-23 Report of Joining NUS, Hefei

It should be noted that the deceptive practices of Nu Skin in China are widespread and not limited to just a few individual distributors. Next are the notes of a representative while visiting the Beijing store and requesting information about working with Nu Skin.

2012-06-08 Report of NUS Visit, Beijing

and then

2012-06-12 Report of NUS Visit, Beijing

And more of the same from Shanghai:

2012-06-18 Conversation with NUS Office in Shanghai and NUS Service Hotline

In none of these cities did we find a recruitment conversation that reflected the written operational policies and procedures of the company. Note that both multi-level commissions and the requirement to buy goods to participate in training (and thereby commissions) are the main abuses of pyramid schemes.

Computer Systems Needed to Implement an MLM Compensation Scheme

Investors need to ask themselves: Could a pyramid compensation plan possibly be propagated without the company’s knowledge and consent?

Think about it. In a multi-level commission structure, each invoice, each retail sale generates a variable number of commission sharing transactions, which have to be accumulated among the credited sales person and all their “upstream” counterparts. Even a few thousand transactions per month would create a nearly impossible computational task without a central computer system. How could this compensation system possibly function without the company’s involvement at its core?

The Story in the Numbers

There are very disturbing signs even though Nu Skin’s revenues in China appear to be booming in the past quarter. First, roughly two-thirds of the Greater China’s revenue comes from just 2 SKU’s. (This is likely why the CFO was reluctant to give the sales-by-product to one analyst on the call.) The majority of those sales were made at the China convention.

Overconcentration of SKU’s on products hyped at the Convention, related to recruiting

The most likely explanation is that the bulk of the sales growth was concentrated around the “business opportunity” and likely temporary. Is buying a 30-day supply supplements at $160 per month or a $300+ anti-aging skin treatment system and trying to re-sell them in China a sustainable business? These products were heavily hyped at the convention.

Spike in Revenue-per-distributor ratio in China, Implies Alarming Risk of Channel Stuffing

This is a lot of product to re-sell and revenue was probably borrowed from Q3. Even more eye-popping is the product purchases per avg. executive at appx $13K — these sales leaders account for the vast majority of the business done in China. The most important question on the call was largely unanswered…:

“any sort of granularity you can give on how you track inventories, or where the product is going…?”

Chasm Between Sales Leaders and Distributors is Red Flag:

Never in the past decade has there been such a big difference between executive growth and overall distributor growth. While one could argue that this is a bullish sign, it clearly goes against management’s assertion that the vast majority of its products are being purchased for consumption. The reality is that a surge in sales leaders necessitates a surge in inventory purchases, such as “Business Builder packages” ( https://www.nuskin.com/content/nuskin/en_US/products/dist_packages/01103800.html ) , along with recruiting-related purchases to obtain status and commission eligibility.

Remember that a high percentage of products purchased for purposes other than end user consumption is a critical indicator of a pyramid scheme in the FTC’s estimation. MLM companies somehow are always able to calculate their pyramid commission payouts, but seem unable to ever track how much of their product is actually being sold to those outside the sales pyramid.

Nu Skin’s Sales Driven by Promises of Achieving Massive Personal Wealth

The common themes of the above interviews are consistent and pervasive: The point of the conversation is to induce the contact to join up to become wealthy, by buying product to become a trainee, and ultimately to become successful by recruiting multiple levels of others whose sales will result in 5% commission earnings per level. These are all the classic techniques of pyramid schemes.

The Chinese internet is rife with examples of the scheme in action. There are numerous “fan sites” and Weibos reinforcing the same theme of personal wealth creation, rather than product features and benefits.

Here is just one of many examples of some content created by a rep on a “fan site”. It’s becoming apparent that they all post the same sort of promotional material and quotes. The image they are trying to convey is you live this carefree lifestyle and not have to go to “work” as a rep. There is the possibility of driving Ferrari’s and making millions while helping people and realizing your true potential. This is a typical entry:

公园就是家，有湖泊、山丘，图书馆，足球场，有缩小版的迪斯尼金银岛！有私人飞机，豪华版摩托车队，伙伴们的车停在一起就像一排鸡翅，因收藏法拉利最多被称为法拉利王子！这就是如新28年成功人的财富生活！如新中国才是最大的未来，单月收入333万美金的全球纪录，必将被中国人打破，也许就是你！

Translation:

“添our home will have lakes, mountains, soccer fields and a small version of Treasure Island! You will have a private jet and a fleet of motorcycles and be called the Ferrari Prince because you have the largest collection of Ferrari痴. This is the life of the successful Nu Skin rep. The Nu Skin record of $3.3m U.S. monthly income will be beaten by a Chinese – possibly you.”

http://so.tudou.com/nisearch/%E8%B5%B5%E7%BA%A2%E5%8D%AB/

This is a blog from a disgruntled Nu Skin sales (a bit dated, but right to the point):

http://blog.sina.com.cn/s/blog_48aa331601000amu.html

It states that the company claims one thing but does another to the Chinese government and to the sales reps. From the blog, it seems that the sales rep are required to buy $1500 of product and have a $10,000 a month quota to avoid getting fired. Once you meet your quota, there are other hoops to jump through to get the 15% small team bonus and the “6th level” 5% bonus. New Nu Skin recruits goes through 4 phases:

1) Brainwashing and chanting slogans

2) Half a year or so of running down savings, family and friends

3) Infighting with team members for prospects

4) Giving up

As a direct consequence of forcing recruits to buy inventory for themselves or to sell to others, there is a lot of Nu Skin product being offered on Taobao, Alibaba and other commerce sites, often at steep discount, which is in violation of the company’s sales policies. For example, there are 86 listings from 36 suppliers here as of the date of publication. http://www.alibaba.com/product-free/106435021/KIT_GALVANIC_SPA_SYSTEM_II.html

MLM Impact on Culture and Cult-Like Behavior

One of China’s concerns in outlawing pyramid selling schemes is their tendency to create cult-like behavior and the attendant harm to the basic social fabric. This goes against many of the basic cultural values of China. It undermines family ties and close friendships by encouraging recruits to regard their family and friends as sales targets – little more than prey. It manipulates economic vulnerability and emotional weakness to convince people to subvert these values with the power of psychological manipulation.

Take a look at these videos of the recent Nu Skin convention in Hong Kong and decide for yourself. The first is a speech given by Cai Si Gun on June 20, 2012 (he lives in mainland China) :

http://www.youtube.com/watch?v=zq2zbuur8xk&feature=relmfu

http://www.youtube.com/watch?v=DT4U9WNdKEQ

( Hint: These thousands of people are not celebrating face cream or nutritional supplements. )

“Good morning everyone.

As I stand here, I remember the Hong Kong convention several years ago. Back then, I sat on your side of the stage. I was seeing what you see now. All the lecturers on the stage looked like ants because I sat so far away from the stage. At that time I wondered, when can I be on the stage making speeches? So today, I want to thank Nu Skin for making my dream come true. Because I think Nu Skin can help all people improve their life. Many people ask me, why did I want to join Nu Skin? The answer is simple. It is because I love my wife. Do you think a good husband should be successful?

Everyday my wife would come home around 10pm. She worked late because she was a finance manager. We had just gotten married, so you know I wasn’t happy about that. On top of that, every day when she got home, she would complain about having too much stress. So I began to think of something for my wife to do. At this time, a couple approached me and told me about Nu Skin. Without thinking too much I told them I wanted to join. I know only a few people like me. I gave my wife Nu Skin as a gift. It was really working, she liked it so much. She wanted to join Nu Skin and she wanted me to join with her. Back then, my hobby was playing cards. I spent a lot of time playing cards because I didn’t have a dream, I felt empty. My Nu Skin trainer’s name was Wangyi, he gave me the idea that nothing is more important than how much money you have. He said I should focus on something where I can teach someone else to make money by working for me. Nu Skin is all about appreciating your predecessors because they help make your successful. They taught me how to catch an opportunity and how to overcome obstacles. For example, one manager asks two employees to investigate the market for shoes in Africa. The first employee told the manager Africa didn’t have a good market for shoes because Africans don’t wear shoes. But the second employee told the manager the market for shoes in Africa is very good because there are not a lot of shoes being worn there. This example just goes to show you everyone sees the world differently. You cannot change the world, but you can change your mind. Don’t scare yourself; you should try to do something. If you never try something then you will never know the answer. Like now, I did it and I succeeded. Now I ask my friend to join Nu Skin, not only because it’s my job, but I also want to help them be successful, beautiful and healthy. If you join Nu Skin, the challenge is how to control your emotion. It’s very easy for me because I think in a positive way, which helps me accomplish things others think are impossible. The more people you introduce Nu Skin to, the more people who will see the potential upside. Thank you. "

The reality is that the vast majority of recruits to pyramid schemes lose the money they are induced to pay for inventory in overpriced products they can never legitimately sell for consumption.

But the consequences are far worse. Pyramid scheme MLM's are an invitation to cult behaviors, which predictably devolve to a variety of techniques bordering on brainwashing to convince their recruits that:

it is a cause for celebration to yearn for wealth regardless of the consequences
any failure is the recruit’s own fault and responsibility, based only on their own lack of motivation to be rich and successful
they should pervert relationships with their own families and friends by treating all of them as marks for sales and recruitment

Consequences of Violating the Law Prohibiting Pyramid Selling

(See in particular Articles 14, 17, 18, and 19 from the law linked above.)

China’s laws are unambiguous and harsh with regard to pyramid sales. Citron suggests that all Nu Skin investors consider the powers granted to the regulatory body responsible for this prohibition, the Department of Industry and Commerce Administration. These include:

Ordering cessation of violating activities
Investigation of anyone involved
Carrying out on-the-spot inspections by entering into the business, training gathering places, etc.
Copying, sealing, or seizing relevant contracts and records
Sealing up business places suspected of being involved in pyramid selling
Applying to the court to freeze unlawfully transferred or concealed funds

… and that is just during the investigation phase.

[The implementation of seal-up or seizure or any measure prescribed in the above actions (seal-up or seizure) requires written approval of the principal leader of the Department of Industry and Commerce Administration at or above the county level, in advance.]

There’s also a “shoot first, and ask questions later component (Article 17):

“Where it is in an inconvenient area or the investigation and handling of the case will be affected if the seal-up or seizure is not timely carried out,the seal-up or seizure may be carried out in advance and the decision on seal-up or seizure shall be made up within 24 hours and be delivered to the parties involved.”

And the Department also has the right to promulgate a warning or a notice to remind the general public.

Political Conditions in China

Citron notes that China is in the midst of a carefully planned 10-year governmental power transition. The theme of intolerance of corruption is particularly strong at these transition points, and the government has been responding in numerous ways to this social concern. Citron wonders whether the incoming government will be as lenient as the outgoing, in terms of allowing this massive pyramid scheme to grow under its watch.

Conclusion

Nu Skin investors are exposed to the massive risk of its China operations coming to an abrupt halt due to violation of the PRC’s and Hong Kong pyramid sales laws. The consequences would be devastating. What would the company be worth without its China operation?

Citron challenges the investment banking community to the following exercise. Which of the 8 firms providing coverage would be willing to review all the evidence of Nu Skin's illegal operations in China objectively, and redraw their models to:

remove all income from China from Nu Skin's P&L
write down the assets for capital spent in China to the business net of multi-level sales (which would be near zero)
- e.g. How many customers would walk into a Nu Skin store and walk out with a retail purchase? Would there even be any "Nu Skin stores"?
reduce the company's growth trajectory to its realistic prospects with China revenues subtracted
project the costs of replacing all management who definitively knew and actively abetted this business development in violation of China's laws …. and …

set a revised price target for the company's stock, to account for the risk to operating an illegal business model.

Is your skin in this game?

Cautious investing to all.

NOTE: Citron is currently seeking clarity on goods destined for mainland China coming in through Hong Kong, which would violate Chinese tax and import laws, may be the subject of future coverage.

Vivus (NASDAQ:VVUS): Why FDA Approval Is Not the Prescription

2012-07-19T10:03:00.002-07:00

Posted in Citron Reports by Stocklemon on the July 19th, 2012

Freedom-to-Operate may be Severely Compromised

Eight years ago this month, (yes Citron has been at it this long), we published an article on Nitromed (NASDAQ:NTMD). Nitromed received FDA approval to combine two generic pharmaceuticals and the stock catapulted to over $20 a share, with every covering analyst posting a "strong buy". Citron pointed out the problems in their business model in the face of Wall Street. The company ended up selling itself 3 years later for .80 cents a share. The moral of the story is FDA approval is not a short path to riches, and the importance of intellectual property cannot be discounted when valuing a pharma company. For a drug with purported "multi-billion dollar market potential", Citron is astounded by the weakness of Vivus' intellectual property protection, and the lack of due diligence on the Street, which allowed things to get so far without a warning flag being dropped.

http://www.citronresearch.com/index.php/2004/08/03/stocklemon-reports-on-nitro-med/

Citron has been carving to the bone on the Vivus / Qsymia weight control pill story, and is convinced this is déjà vu all over again. Similarities include:

· A "blockbuster" drug — which is just a combination of two readily available, inexpensive generics

· A one-drug pharma company – with an abysmal track record long on hype and failed execution

· Notable absence of a deep-pockets marketing partner, having to "go it alone" with its home-grown and risky marketing plan.

· Vivus's intellectual property protection for its much publicized diet drug Qsymia appears riddled with flaws

The Drug Story Background

With FDA approval obtained for its weight loss drug Qsymia, VVUS stock price has tripled over the last year, fattening up its market cap close to $3 billion, all for a drug that we believe will never become commercially viable.

This report will identify major problems in the intellectual property foundation supporting VVUS's weight loss drug.

Considering Vivus had a favorable 20-2 advisory panel recommendation in hand in February, the company knew FDA approval this week was a certainty. They have had the last 5 months to sign a licensing / distribution / partnering / deal with a credible pharma marketing company. J&J — a likely rights-holder in at least one of the patents looming over Vivus' freedom to operate — would have obviously been the company’s first phone call in February. Instead, insiders sold virtually all their options-vested stock, and the company raised money from investors.

After all, Vivus, is a 38-person company with scant history of manufacturing or selling a drug. Why have they not been able to sign up a marketing partner or a strategic investor for Qsymia over the past 5 months ? Citron finds this odd … Like Kate Upton not being able to find a date. Possibly the problem here is no one wants to get in the middle of what seems to be an inevitable intellectual property battle with J&J and/or others that will likely delay and possibly threaten the production of Qsymia.

Because of this overhanging risk, any third parties supplying topiramate to Vivus might be liable for contributory infringement for supplying an Active Pharmaceutical Ingredient – a risk for any drug supplier who knowingly infringes a patent.

Vivus's Intellectual Property Story: Serious Doubts about its IP Protection

"You can avoid reality, but you cannot avoid the consequences of avoiding reality."

- Ayn Rand (1905-1982)

While the company has been busy furthering their FDA submission and selling stock, Vivus has simply avoided confronting the reality that they might not even be able to go to market.

The foundation stone of Vivus' IP protection is a patent licensing deal signed a decade ago with a Dr. Najarian, an obesity doctor and researcher who filed as sole inventor for Qsymia's two-drug combo. One question that has been hanging over the company for years is the possibility of patent infringement on one of Qsymia's two active ingredients, topiramate, a patent held by Johnson & Johnson, who used to sell the drug as an obesity treatment before it went generic. It affords patent protection until 2017. It originally was filed by a researcher named Shank on June 29, 1996 (US PTO No. 6,071,537)

You do not have to be a patent attorney to read the title of the abstract:

"Anticonvulsant Derivatives Useful in Treating Obesity"

There is no evidence of the validity of this patent ever being challenged, either at the USPTO or the corresponding EP patent (EP0915697) filed here. There are no mentions in Vivus' filings of the Shank patent, and therefore no clues as to how Vivus plans to deal with it. They do say in their 2011 10-K:

We are aware of issued patents for the use of topiramate alone or in combination with other specific agents (zonisamide and mirtazapine) for treatment of obesity and related indications e.g. prevention of weight gain. We have worked closely with our patent counsel to put together a cogent patent strategy and are building a strong patent portfolio in an attempt to obtain exclusivity over the life of the patents.

And??? You've worked on it? What is the answer?

How exactly does Vivus overcome the Shank patent to sell topiramate for weight loss? Citron rates this unresolved question a substantial risk factor.

Here is an answer given by Vivus head of corporate development, Tim Morris at a recent conference when asked about the Shank patent:

TIM MORRIS: … this refers back probably to the Shank patent which is owned by Ortho. And as you guys know, topiramate was marketed by J&J for several years, it's now generic. We've talked about this in the past.

We don't believe there's any issues in terms of we've looked at the issue patents from Shank, we've looked at the issue patents for us, several patent counsels have opined on them. Both patents are issued and we think they're valid.

We don't believe there will be any concern there. Obviously topiramate is not approved for obesity. We don't believe J&J is making any money off topiramate for obesity. And so, no, we're not concerned at all about J&J. It's obviously a topic for the Street and people love to opine and write on it, but for us it's full steam ahead.

It doesn’t make a difference if you think your patents are valid…what does J&J think? Citron notes that …Tim Morris sold ALL of his Vivus common stock the same week in February that the company received its favorable vote from the FDA advisory panel …

This is Morris's version of "Full steam ahead" :

http://www.sec.gov/Archives/edgar/data/881524/000110465912013476/xslF345X03/a4.xml

Yet, Vivus does slip this line in their filings:

We may be unable to in-license intellectual property rights or technology necessary to develop and commercialize our investigational drug candidates.

It is impossible to assess the market value of Qsymia to Vivus until this issue is fully disclosed and resolved.

Potential Problems in Vivus's product protection based on the Najarian patent.

As if the Stark patent issue was not enough, there are also unanswered questions about the main patent Vivus appears to be relying on behind Qsymia – the one licensed from Dr. Najarian. A condition was introduced to the assignment agreement between Vivus and Dr. Najarian that made future milestone payments contingent on the Najarian patents prevailing over another, earlier-filed third-party patent by inventor McElroy. The company found the McElroy patent important enough to make it a condition in the licensing agreement with Najarian.

Very soon after Dr. Najarian assigned his patent to Vivus in 2001, the McElroy patent issued, with claims related to methods for treating disorders that include obesity using sulfamates (including topiramate) in combination with psychostimulants (including phentermine).

This is a second threat to Vivus's freedom-to-operate and, it is referenced explicitly in the assignmentagreement from Dr. Najarian on October 16,2001. (See 3.2.(ii) and 3.2.(ii) for specific references ). In fact, payments to Dr. Najarian are explicitly made contingent on "freedom to operate" with relation to the McElroy patent.

http://www.sec.gov/Archives/edgar/data/881524/000104746910002009/a2197107zex-10_79.htm

It should be noted that Dr. Susan McElroy is the director of psychopharmacology research at University of Cincinnati and is widely published on obesity and mental disorders.

http://www.amazon.com/Obesity-Disorders-Medical-Psychiatry-ebook/dp/B001H53VKS

http://www.psychiatry.uc.edu/FacultyStaff/FacultyProfile.aspx?epersonID=mcelrosl

Prior art is not pretty for Vivus:

The Najarian patent has a huge problem with regard to dates. Simply, the McElroy patent's provisional filing was earlier – Feb 24, 1999 – than the Najarian patent, which was June 14, 1999 (search for "provisional" to verify these dates). And note that McElroy's full filing appropriately references the June 2000 Shank patent. It includes studies in which Binge Eating Disorder patients were treated with open label topiramate in doses from 25 mg to 1200 mg. (The use of phentermine at varying doses to treat obesity was well known at the time.) Now, it remains possible that with the proper documentary evidence, the Najarian patent defense could "swear behind" the McElroy patent to get date precedent in the US – an uphill struggle for Vivus. But such a claim will not hold up in Europe, because outside US jurisdictions, the provisional patent filing date prevails.

Dr. Najarian's patent application doesn't reference McElroy until he files this Supplemental Information Disclosure dated December 13, 2001 without further description. Najarian and Vivus obviously had to know about the significance of the McElroy patent, because the entire Vivus assignment from Najarian in October 2001 is contingent on Vivus obtaining freedom to operate without interference from the McElroy patent specifically. But later patent filings state no reference to this important prior patent application. Whether an intentional oversight or impermissible intentional misstatement, it leaves open the door to a ruling nullifying the Najarian patent in its entirety — yet another door opened for patent litigation.

Obviousness is a problem for Vivus

In its simplest terms, US Patent Law requires that an invention be novel and non-obvious. For example, simply varying the dosing of a drug which shows side effects proportional to dosage is not sufficiently novel to qualify for a patent.

The patent examiner in Dr. Najarian's case challenges this very point: that combining two known weight loss drugs to treat obesity is obvious. Najarian's declaration counters: (see page 4)

"The claimed combination has surprisingly fewer side effects than the individual drugs."

"…I surprisingly found that the addition of a sympathomimetic agent such as phentermine greatly diminished the side effects of the topiramate. Further, this allowed patients who, previously, could not tolerate topirate, to be able to take topiramate in combination with phentermine. … "

This is an extremely important statement to the patent.application's defense. Even if Dr. Najarian submitted this statement in good faith, he has a duty of candor with regard throughout the pendency of both the originally-filed and subsequently-filed applications to disclose all information known to the application that might impact patentability. The question is, in light of the sizable studies performed on Qsymia to gain FDA approval, and the copious commentary on its side effects, does Dr. Najarian still believe the above statement is accurate and defensible? No side effects observed with this drug combo ?

The huge body of clinical evidence, including Vivus' own studies submitted for FDA approval, indicatethat side effects of Qsymia are essentially proportional to dosing. The very body of evidence that Vivus submits for safety adds to the same exact body of evidence a challenger would use to attack the Najarian patent for non-novelty and obviousness.

Referring to Vivus' own FDA Advisory Briefing Document (linked below):

"As such, the side effects of QNEXA [now Qsymia –ed.] therapy are expected to be consistent with those described in the approved labeling for phentermine and topiramate, albeit at a severity consistent with lower doses."

Any party challenging the Najarian patent will find they have been handed extremely strong legal grounds to attack its validity on the above comments.

Patent Ownership Uncertainties

There is further a question as to whether Dr. Najarian actually owned the patent personally, as he filed. Or did he have an obligation to assign his invention to one or more of his employers?

At the time his assignment to Vivus was executed, Dr. Najarian was the VP of Medical Affairs and Medical director at Interneuron Pharmaceuticals. Typically, work-related inventions such as this fall under an employee's duties under employment agreements to be assigned to the employer. Interneuron changed its name to Indevus, and was later bought by Endo Pharmaceuticals.

Interneuron had some track record with weight loss drugs. In fact, it was the producer of the widely prescribe Redux, recalled in September 1997, due to correlation with heart valve problems. Redux was a correlate of one half of the infamous "fen-phen" combination. Clearly Dr. Najarian was deeply involved in weight loss treatments. However Dr. Najarian lists himself as the sole applicant. Vivus entered into its Assignment Agreement with Najarian solely and personally. No further evidence of Najarian's relationship was documented.

Further, records indicate Dr. Najarian was a staff physician at two hospitals during the same timespan he cites administering this drug combination to patients in what appear to be small informal trials referred to in his patent application. Employment agreements both at drug companies and medical centers routinely claim intellectual property rights from trials conducted by employees in their facilities, unless specifically excepted, such carve-outs never having been placed on the record in this case. Not to mention, he appears to have been conducting drug trials without legal oversight, and citing these to his own apparent benefit in his patent application. If he argues they weren't "really" drug trials, but just ordinary course doctoring, he undermines his own "non-obviousness" and "novelty" arguments. It's quite a pickle once you think about it.

Did Dr. Najarian have full rights to assign this patent to Vivus? Do investors really think nobody will challenge this patent? Do they really think the best strategy for maximum economic leverage for a patent challenger has been anything other than to wait quietly until the FDA approved Qsymia, rendering the patent more relevant, on Vivus's dime? If the patent's original applicant assigned the rights to it improperly, is the patent still valid? Who really owns those rights ?

Vivus has had not just the last 5 months, but 5 years since questions about the Najarian, Shank and McElroy patents were posed by analysts, to create enough clarity to go to market. Yet to this day, all we hear from the company is assurances that they have legal opinions in hand stating "they are OK". No joint ventures, no counterparty agreements, no releases.

Quite a cloud of uncertainty for a "multi-billion dollar opportunity" resting on the combination of two common generic drugs, don't you think? If this were a solid pharma with high management credibility, maybe investors could give them the benefit of the doubt. But this management? Read on.

Competitive Landscape: Generic Drug Competition

In its most recent 10-K, Vivus's disclosure speaks for itself:

"Our investigational drug candidate, Qsymia, is a combination of drugs approved individually by the FDA that are commercially available and marketed by other companies. As a result, our drug may be the subject to substitution with individual drugs contained in the Qsymia formulation and immediate competition. "

Beyond the above uncertainties surrounding Vivus' Intellectual Property rights to this drug combination, the company faces tough market challenges trying to enforce its territory in the marketplace. Because the generic components of Qsymia are widely available, some doctors are likely to continue to prescribe phentermine and topiramate (millions of prescriptions of each were written last year, see FDA Advisory Briefing Document excerpt below). The clinical trials of record provide plenty of protection from liability for doctors making such choices. This places Vivus in the unenviable position of trying to enforce non-patent exclusivity against prescribing physicians.

In the words of Vivus' own FDA Advisory Briefing Document:

Phentermine hydrochloride at a labeled dose up to 37.5 mg/part is the most prescribed weight-loss drug in the US with approximately 6.5 million prescriptions written in 2011 [ IMS data]. A more recently approved formulation of phentermine, Suprenza Tm, was approved in 2011. ….. More than 10 million prescriptions were written in 2011 for topiramate [ IMS data ]. The majority of current topiramate use is in migraine prophylaxis.

http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM292317.pdf

While these citations lend credibility to Vivus claims about the drug's safety, the fact that bothingredients are available and in wide use as generics makes enforcing the company's patents far more challenging (and perhaps raises hurdles to negotiating reimbursement).

CEO Wilson's stated strategy, that a combination of patent protection, establishing a dosage regimen that is between strengths of generically available competition (compare 46mg Qsymia to 50 mg generic topiramate), and adding in time release features, create a barrier to entry for Qsymia generic competitors. However, his own cited example for this strategy (during a 2006 conference call) met quite an unfortunate end. Ditropan from Alza Corporation, which was a controlled-release formulation of oxybutinin, had its own patent ruled invalid just a month later — for obviousness. [LINK] The company's sales fell from $380 million prior to the ruling, to $15 million within a few years. He stopped citing Ditropan after that.

Vivus might be granted three years of non-patent exclusivity due to providing a new clinical study and/or formulation, which is far less than the 20 years from first filing that strong patent protection might afford. But in the face of freedom-to-operate challenges above, Qsymia might experience outcomes ranging from zero exclusivity to three years, or partial three year exclusivity, shared with generics.

Translation: Severe pricing and competition headwinds ahead.

Just for grins we looked up some prices on the Costco pharmacy site. We found phentermine 15 mg at about 44c per pill, and topiramate 100 mg is about 23c per pill in Costco-sized bottles of 100. So that would be about $20 a month for generic treatment at the top-level dosage of Qsymia (at 15mg/92mg). And the generic approach leaves doctor and patient free to adjust or taper the proportion of the two drugs, flexibility they wouldn't have with Qsymia … and, at no extra charge.

Vivus's Corporate History: Failure to Execute

Vivus is not just any startup biopharma company. It has been operating for over 20 years with the same CEO, Leland Wilson. Vivus began its life as a publicly traded company pursuing a treatment for erectile dysfunction for males. In the mid-1990's, iIt actually produced and brought to market a treatment involving inserting a suppository into the male urethra. Despite approval by the FDA and in Europe, a firestorm of hype, an initial sales bubble, and a brief stock run to over $1 billion valuation, the product failed to gain market share and was sold in 2010 to a 3^rd party for just $23.5 million.

While Vivus's stock has languished in junk stock (sub $5) land for most of the last 20 years, the company has pursued a variety of highly promoted "stories", mostly concerning various attempts to introduce products to treat so-called "feminine sexual dysfunction", including testosterone spray and vasodilators.

Despite the company's hype-marked history, the following table is relevant to investors because Vivus's 20 year history illustrates one of the most consistent records of failure in the history of publicly traded companies in America.

Click to review VVUS 20 years cumulative results

Insider Sales

Regular readers of Citron know that we like to follow the dollars. There's only only thing more disturbing than the hole where a marketing or strategic partner should be — the amount of insider selling. Insider sales in Vivus over the last twelve months are 1.7 million shares between $9 and mid $20's, and current insider ownership is down to 0.29% according to Bloomberg. Do we have to belabor the point that this is incredibly small for a company with zero revenues that holds the license on "the next big thing"?

Conclusion

Despite years of lead time, Vivus' executives have failed to provide strong patent protection for Qsymia. Taken together, these points provide the best explanation yet why Vivus hasn't been able to recruit a high-profile deep-pocketed pharma partner to leverage its expertise while taking some of the risk of marketing its newly approved diet combo drug. Instead of selling a stake to a credible pharma marketer, they sold stock – over $230 million to …. you guessed it. The hope that a big pharma company is going to ride in pay $3 billion for Vivus is ludicrous – the strategy of trying to pierce its patent protection for a few million in legal fees is a far lower risk.

The more marketing hype about the FDA approval of this combination of two well-known and inexpensive legacy generic drugs, the more Vivus sets up its own ambush – by legal challenges to its patent, and generic drug competition starting before they can even get to market.

There is long track record in the US of diet drugs being horrible investments, due to having a very short half-life. Consumers seem to move from one fad to the next, only to discover there is little that substitutes for exercise plus lowering caloric intake…. and we don’t even think this one gets that far.

To conclude, Citron offers a two part generic prescription

· For your health:
Eat a diet rich in nutrition and exercise. Eliminate junk food from your diet.

· For your prosperity:
Invest in high-quality companies run by management with a strong track record of success. Eliminate junk stocks from your portfolio.

Citron believes that in 1 year, Vivus's Qsymia revenues will be exactly what they are today: 0.

Cautious (and healthy) Investing to all

Initiating Coverage on EDU – Strong Sell

2012-07-18T10:52:00.001-07:00

Published: July 18, 2012

Muddy Waters rates New Oriental Education & Technology Group (NYSE: EDU) shares a Strong Sell because it is probable that EDU will have a significant restatement and possible that its auditor will resign because:

EDU has reported 392% revenue growth since going public. The revenue growth has been built on store growth of 338% during this time. EDU tells investors that its entire store network is company-owned, but this is a lie. As recently as last month, EDU president and CFO Louis Hsieh adamantly denied that EDU has any franchisees. This report shows Hsieh’s statements are patently false – EDU has numerous franchisees. However, these franchisees are not a hidden bonus for investors. Rather, they are part of a substantial fraud in EDU’s accounts.
It is virtually certain that EDU uses the upfront franchise and other fees to inflate its cash balances in order to receive unqualified audit opinions from its auditor.
EDU’s Beijing operation (which is approximately 35% of EDU’s reported revenue) has prepared financial statements for 2009 – 2011 are fraudulent. EDU has submitted these financial statements to its domestic regulator, the Civil Affairs Bureau (“CAB”). It is probable that EDU used these same financials in the preparation of its U.S. filings.
EDU’s corporate structure is far more problematic than just a weak VIE. The schools that conduct its operations are ultimately state property. We question how EDU can consolidate them.
We believe that as a result of our exposure of these problems with EDU’s reporting, EDU will restate historical results – likely significantly; and, that its auditor will resign.

[1] Calculation based on RMB revenue, and excludes currency fluctuations.
[2] Store count number includes schools and learning centers; it excludes book stores.

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New Oriental Education Called Into The Principal's Office

2012-07-17T12:40:00.003-07:00

If you're a current New Oriental Education investor, Tuesday's earnings must have you scratching your head.

New Oriental Education reported impressive beats on the top and bottom lines. Unfortunately, shares gapped lower and not higher. New Oriental Education is a Chinese company, but investors are liquidating the entire space. (See my recent article Will Bridgepoint Be Held Back a Year?)

BPI data by YCharts

New Oriental Education has lost about 30% of its market cap from Monday's close. New Oriental Education disclosed on its website they are the target of an active SEC investigation.

According to the website:

"On July 13, 2012, the Company was informed that the U.S. Securities and Exchange Commission (the "SEC") had issued a formal order of investigation captioned 'In the Matter of New Oriental Education & Technology Group Inc.' The Company believes that the investigation concerns whether there is a sufficient basis for the consolidation of Beijing New Oriental Education & Technology (Group) Co., Ltd., a variable interest entity of the Company, and its wholly-owned subsidiaries, into the Company's consolidated financial statements. The Company intends to fully cooperate with the SEC in its investigation."

Only two sentences in an earnings report that is otherwise glowing with positive results. No one wants to read "SEC investigation" about their stock, especially one based in China.

New Oriental Education may not know the full details of the investigation, but there is one thing we do know. The SEC is suing auditors for not providing audit documents. TheStreet's Timothy Collins recently called EDU a short candidate. If you read Collins' article you would have known about EDU before the fall. (You need a Real Money Pro account to read, but Collins' analysis makes it worthwhile.)

New Oriental Education used Shanghai Deloitte as the auditor for the 2011 annual report. Shanghai Deloitte was sued by the SEC about two months ago for failing to submit requested documents to the SEC. Deloitte argues it is caught between two separate and conflicting sets of laws. Deloitte, in its defense, has claimed it is not legally allowed to hand over certain documents because of state secrets laws in China.

The bottom line is, investing in Chinese stocks adds another layer of risk for investors. The risk is further compounded by the current inability of the SEC to impose sanctions against Chinese nationals for securities fraud. U.S.-listed and -traded Chinese stocks are a perfect storm for securities fraud. There is nearly zero risk for a potential perpetrator and a life time of riches for a successful fraud.

I have written about the risks facing investors for about a year now. With so many opportunities available in the North America and Europe, there is no reason to play Russian roulette with your portfolio. In Russian roulette, players use a six-shooter, effectively giving odds of failure at 1 in 6. Based on my experience, the odds of failure with a Chinese company listed in the U.S. the odds of failure are about 1 in 8.

Why SOHU is the best buy in the China Internet Space

2012-07-17T04:31:00.000-07:00

YOKU acquires TUDO: Why isn't SOHU worth $90?

YOKU's acquisition of competitor TUDO yesterday represents a strong move to consolidate online video in China. Considering the current market, there were just three impact players: YOKU, TUDO and SOHU …. and now there are two. The market reaction to the transaction, including today's substantial follow-through up-bid in both the acquirer and the acquired, means that the market is valuing video in China as "the next big thing". If the market was saying "YOKU overpaid", YOKU would have sold off, but instead it is rallying further.

Looking at December's figures, which are representative of trends in the second half of 2011, we see:

December 2011	Video Websites, Total Minutes, millions	Total Page Views, millions
YOKU TV	1,801	2,142
TUDO Sites	1,405	2,097
SOHU TV	2,445	2,155
Next 5 competitors combined	1,738	2,256

Data source JP Morgan

These numbers validate the attractiveness of SOHU's content, demonstrating stickiness by attracting viewers to view more minutes per page view than its competitors.

Yesterday's purchase of TUDO for appx $40 a share in YOKU stock sent both YOKU and TUDO soaring, validating a purchase price north of 1.5 Billion USD. The case for SOHU Video being worth more is obvious.

SOHU TV is not an afterthought. It has been carefully assembled, and streams some of China's highest quality content from Sony, Disney and MGM amongst others. As the CEO stated on their last conference call, they stream 21 of China's top 30 prime time dramas. All this has caused their viewer metrics to have grown 250% to 300% since Q1 2011.

SOHU is an integrated internet operator, with strong positions in games, streaming video, search, and a leading portal. Its games business comes via its 63% ownership of publicly traded Changyou, a leading online games vendor in China. Sogou's Pinyin search has demonstrated genuine popularity with users, and is steadily gaining market share in a sector written off to domination by "winner take all" dynamics.

We rate SOHU's business development strategies as coherent and credible.

Taking a "sum of the parts look" at SOHU's enterprise value, JP Morgan does a conservative and credible job of valuing search, portal and games components. But given what we now know about the enterprise value of video, we see SOHU north of $90 a share.

Segment	Value (mil USD)	Comment
SOGU	200	Search, gaining market share, in a sector written off as impossible
Games — CYOU	1,000	Leading player in the space, DD Tank
Portal	700	Conservative in relation to SINA and others
Video	1,200	Pegged by YOKU TUDO transaction
Cash	500	In addition to CYOU cash position
Sum of parts	3,600	Conservative Valuation estimate
Shares o/s	38.76	Million shares
Valuation p/s	$93.00

We couldn't help noticing that even iResearch, in a recent report, measures Sohu's weekly unique visitors 50% higher than Qihoo 360. If SOHU carried the same market cap as Qihoo, its portal would be valued at $3 billion, and SOHU's per share valuation would be $145.00.

Company	Category	Weekly UVs(M)	%Change
Tencent	Portal	276.43	+ 4.47%
Baidu	Search	266.81	+ 4.64%
Sina	Portal	188.46	+ 4.16%
Sohu	Portal	181.83	+ 3.84%
NetEase	Portal	129.20	+ 10.24%
Qihoo 360	Navigation	116.25	- 2.83%
Youku	Online Video	131.27	- 0.11%

Company	Category	Weekly UVs(M)	%Change
Renren	SNS	61.31	+ 9.96%
Dangdang	E-commerce	4.40	+ 6.42%
Ctrip	Travel	37.80	+ 8.40%
58.com	Classified Ads	20.98	+ 4.37%
360buy	E-commerce	16.67	+ 6.64%
Lashou	Group Buying	7.38	+ 3.43%
Vancl	E-commerce	8.15	+ 0.53%

Source: iUserTracker, professional user behavior monitor software with more than 200,000 Internet users in China

No, we don't think SOHU is worth 145, but it demonstrates how ludicrous Qihoo's valuation is at a $23 share price.

Cautious Investing to All.

Game Over for China Natural Gas: SEC Charges Company with Fraud

2012-07-16T13:50:00.001-07:00

SEC filed a complaint yesterday alleging fraud against China Natural Gas and its Chairman Qinan Ji, (formerly NASDAQ: CHNG). This marks the 3^rd complaint in the past 3 months filed by the SEC against Chinese frauds first exposed by Jon Carnes, the owner of A*L. On February 22^nd, the SEC charged Ming Zhao, Chairman of Puda Coal, with fraud (link here). On April 23^rd, the SEC charged SinoTech Energy and its Chairman with fraud (link here). The SEC’s press release and complaint against CHNG can be found here.

Mr. Carnes was the first to publicly accuse CHNG of fraud in an anonymous report published February 12, 2010 in an online blog. An archive of the original report is available here. Mr. Carnes removed the reports from the blog after being threatened by an agent of CHNG Chairman Qinan Ji.

In the SEC’s press release accompanying the complaint, John M. McCoy III, Associate Director of SEC’s Los Angeles Regional Office, stated:

“Ji betrayed China Natural Gas investors by misusing company funds to benefit his family and repeatedly lying about it. Ji’s misconduct caused China Natural Gas to file a series of false reports with the SEC and showed total disregard for his obligations as an officer and director of a company whose stock trades in the U.S.”

The SEC’s complaint focuses on two events:

1) Qinan Ji loaned over $14 million to friends and relatives without disclosing it and later lying to cover it up.

2) Qinan Ji acquired Lingbao Yuxi for $19.6 million without board approval or properly disclosing the transaction.

Importantly, the SEC noted that its investigation of CHNG is continuing.

A*L commends the SEC’s actions and hopes the agency will continue pursuing fraudulent Chinese companies despite the inherent difficulty the SEC (and investors) face collecting settlements from Chinese entities.

Chinese stocks quietly slip back to Feb 2009 level

2012-07-16T12:40:00.001-07:00

Amid the usual perma-bull prognostication, nonsense, fraud and rampant willful blindness in the investment community, Chinese stocks closed today at 2147, the lowest level since Feb 2009 and now a full 35% lower than the latest “recovery” peak at 3300 in July 2009. (Hey wasn’t that 1.3 billion population the commodity bulls talk about supposed to have prevented this? Where are a billion+ consumers when you need them?)

This is the same index that was above 6,000 at the peak of the credit bubble in October 2007 before falling 72% in one year to bottom at 1671 in October 2008. Worth noting is that the Chinese economy has been leading the global economic cycle for the past several years and its stock market has led other global stock markets by several months. In the last recession, the Shanghai market bottomed October 2008 some 5 long months before North American stock markets hit bottom in March 2009. If the Shanghai were to bottom any time soon, that would still suggest a few more months of potentially nasty decline in global stocks before the present cyclical bear market has run its course.

AutoChina tycoon baffled by US probe

2012-07-16T10:32:00.002-07:00

By ELAINE KURTENBACH

SHANGHAI (AP) - One of China's biggest commercial vehicle dealerships is among the dozens of Chinese companies with shares listed in the U.S. that have been targeted by short-sellers for alleged financial abuses or probed by regulators. Its case highlights how gray shades of business dealings in China can run afoul of American rules in black and white.

Founded by tycoon Li Yonghui, AutoChina is based in the hardscrabble northern Chinese city of Shijiazhuang and says it has 512 branches and has leased more than 33,000 trucks since it launched in 2008. In an interview with The Associated Press, Li seems genuinely puzzled by his company's predicament.

A probe of AutoChina by the Securities and Exchange Commission into allegations of market manipulation is complicated by frictions between U.S. and Chinese authorities over the sharing of financial information, a lack of transparency, and outright clashes of business cultures and practices. It was delisted from the Nasdaq last year after falling behind on its financial reporting.

In April, the SEC said it was suing 11 AutoChina investors and Hui Kai Yan, one of the company's directors, for allegedly placing fraudulent trades to create the false impression that the stock was traded more actively. The regulator said the company and the investors made hundreds of questionable trades starting in October 2010, using more than $60 million that had been deposited into U.S. brokerage accounts.

"Investors may think many Chinese companies are faking their accounts, and that may be true, I'm afraid, but I have never had any problems," Li said.

"Our company has had no problems either in terms of its operations or its finances," he said.

Like many other foreign companies with U.S. shares, AutoChina used a reverse merger to list on the Nasdaq. This backdoor procedure enables a company to become publicly traded by buying an already-listed shell company and avoiding the more rigorous process of an initial public offering.

AutoChina's onslaught of bad news started in late January 2011 when analysts using the name "The Forensic Factor" issued a report questioning its accounting practices. The SEC began a probe into AutoChina's financial disclosures in April 2011. The company's shares are now relegated to trading on the Over-The-Counter Bulletin Board, a market of corporate flotsam that requires less financial disclosure than mainboard stock exchanges.

The SEC crackdown on market abuses and shady accounting practices has coincided with a sharp rise in the number of class-action lawsuits filed against foreign issuers of securities, which more than doubled in 2011 according to a study by audit company PwC. Almost two-thirds were against mainland Chinese companies.

"I wouldn't necessarily call it a witch hunt, but there are legitimate companies that could get caught up in a sense," said Neal R. Marder, a partner in Los Angeles at law firm Winston & Strawn LLP. He has represented at least two Chinese companies that have sought to fight back.

Chinese government rules barring accounting firms with operations in China from sharing information with authorities overseas have hindered SEC efforts to investigate in such cases. "Accounting firms as well as any business in the PRC have to abide by trade secrets laws, privacy protections and blocking statutes in China," said Marder.

After two decades of doing business under China's capricious legal and political system, Li is no stranger to a fight. A foray into real estate investment in the late 1990s that involved an attempted takeover of a state-owned real estate company put him at odds with top local leaders. They detained him for several months until he gave up the takeover bid.

"In China, they catch you first and then try to prove you have violated some law," Li said. "They could find nothing that I had done wrong so they had to let me go."

Li and Diana Liu, a Taiwan-born Canadian citizen and AutoChina board member whose Spring Creek Investments was the vehicle AutoChina used to list on Nasdaq, vehemently deny they or the company played any role in the share trades questioned by the SEC.

Li and Liu are not among the investors and companies named as defendants, most of whom the SEC said are Li's relatives or AutoChina employees.

Liu contends that the investors named in the complaint were simply backing the company through an "investment club" that involved pooling their savings for occasional online trades.

"It's not like in the U.S., where when an investor wants to buy or sell he goes to the bank or does it online. In China they tell the person in charge of handling the trades who wants to sell and who wants to buy. He does the transactions for them," she said.

At the heart of AutoChina's troubles, Li said, were difficulties over getting its former auditor PriceWaterhouse Coopers to approve its 2010 financial reports. Eventually AutoChina replaced PwC with another U.S. auditor, but by the time it filed its earnings, it was due to be delisted.

"We appealed, but without any explanation at all they said they would not allow us to continue to be listed. Is that transparent? Why did my company have to delist? Up to now nobody has explained it," Li said, his frustration showing through his calm, soft-spoken demeanor.

Some of the short-sellers' accusations were false, AutoChina contends. However, the company did respond to complaints over an "earn-out" in its share listing that awarded shares to Li, thus diluting the value of holdings of existing shareholders, by cancelling that provision.

PwC did not respond to a written request for comment on the case. The SEC also has not responded to an emailed request for comment.

While waiting for the case to go to court, Li said he is busy expanding AutoChina's insurance business and other services.

"My intention is to build up a vehicle-leasing 'McDonalds,'" he said.

But the barrage of questions over Chinese company shares is discouraging mainland companies from attempting listings. Many are opting to go private, or to reconsider listing in Hong Kong or other overseas markets.

"We considered whether to list in China, in Hong Kong or in the U.S. I thought that America would be the most open, most just and most transparent environment, the most favorable for business. Now, I believe that is not the case," Li said. "If I were to have another chance, I probably would not choose this route."

The Stock That Sticks Up Gets Hammered Down: NANI, CEAI & CAST

2012-07-16T10:26:00.001-07:00

Chinese education stock Neologic Animation (OTC: NANI) has recently been getting plenty of attention from investment newsletters thanks to paid promotions but before traders just in on this latest Chinese reverse merger, it might be a good idea if they consider what happened to two other Chinese education stocks: China Education Alliance (PINK: CEAI) andChinacast Education Corporation (PINK: CAST). Specifically, China Education Alliance (CEAI) and Chinacast Education Corporation (CAST) were highflyers until they became dogged by fraud allegations or internal strife and there is the old (apparently) Japanese saying (that sounds very Confucian) to the effect that: “The nail that sticks up gets hammered down.” So will Neologic Animation (NANI) get hammered down like China Education Alliance (CEAI) and Chinacast Education Corporation (CAST)? Here is a quick reality check by looking at all three:

Neologic Animation (OTC: NANI): A Chinese Pump and Dump?

Neologic Animation was founded by “renowned” child psychologist and author, Dr. Zhang, as an after school education Website for primary school students in China. Specifically, Neologic Animation offers interactive, web based games for difficult concepts that children must learn to succeed in school. According to various disclosures, transactions of $30k and $60k have occurred from M & B Capital Services, Ltd to recently promote Neologic Animation in various newsletters plus there have been posts on online message boards from traders who have received messages or emails pushing the stock. On Tuesday, Neologic Animation rose 12.34% to $0.163 (NANI has a 52 week trading range of $0.04 to $0.20 a share) for a market cap of $26.52 million plus the stock is up 176.7% since it started trading via a reverse merger earlier this year. I am not seeing any detailed reports about Neologic Animation alleging fraud but then again, the stock only just started recently trading on the OTC – meaning its not going to be on the trading screens of many investment houses or short sellers. Nevertheless and if Neologic Animation gets enough attention, you can count on some type of allegation to surface.

China Education Alliance (PINK: CEAI): Still Too Good to Be True?

China Education Alliance provides online education and on-site training in China plus it has a data base of more than 400,000 exams and test papers and courseware for college, secondary and elementary schools that it markets under the Famous Instructor Test Paper Store brand. On Tuesday, China Education Alliance closed at $0.60 (CEAI has a 52 week trading range of $0.42 to $3.75 a share) for a market cap of $6.35 million but I am not seeing much chart data from either Google Finance or Yahoo! Finance which is odd because CEAI is a Chinese reverse merger dating from 2004. However, its worth noting that on November 29, 2010, Kerrisdale Capital Management released areport claiming that China Education Alliance was fabricating financial statements made to the SEC and the allegation caused the company’s stock to sink by 79% to $2.45 while its market capitalization shrank by $61 million. Specifically, Kerrisdale Capital Management flagged discrepancies between China Education Alliance’s SEC filings and those with the State Administration for Industry and Commerce (SAIC) that showed the company had generated less than $1 million in revenue in 2008 (rather than the $24.85 million reported to the SEC). However, Kerrisdale Capital Management was a largely unknown firm prior to the report – which generated considerable publicity for it. Otherwise and for the first quarter, China Education Alliance reported that total revenues fell by 31.3% year-over-year to $4.8 million, gross profit fell by 52.4% to $2.2 million and the company had a net loss of $0.1 million. According to China Education Alliance, first quarter results were weaker on account of seasonality and the “prolonged effects of the unsubstantiated allegations that surfaced towards the end of 2010.”

Chinacast Education Corporation (PINK: CAST): Dogged By Allegations and Internal Strife

Chinacast Education Corporation intends to be a leading private, post-secondary education company in China that provides both physical campuses and a comprehensive online learning platform to address the market for university graduates with career skills and adult continuing education. However, its worth noting that Chinacast Education Corporation is not a Chinese reverse merger as the company was originally financed by Intel (INTC) and DirecTV (DTV) and Hong Kong's second largest conglomerate, Sun Hung Kai, back in 2000 and then it had an IPO in May 2004 on the Singapore Stock Exchange. In December 2006, the company was acquired by Great Wall Acquisition Corporation, a special purpose acquisition corporation (SPAC), and then it was listed on the Nasdaq Global Market in October 2007 but the stock recently got booted off of there for failing to file Form 10-K for 2011 (it also needed to restate financial results for 2010 in order to reverse a write-off of certain prepayments). On Tuesday, Chinacast Education Corporation rose 11.32% to $0.59 (CAST has a 52 week trading range of $0.30 to $6.45 a share) for a market cap of $28.92 million but the stock had traded between the $4 and $8 level for most of 2009 through to this year according to Yahoo! Finance charts. Nevertheless, Chinacast Education Corporation was hit by fraud allegations last year – including some in a detailedreport from Kerrisdale Capital Management. Besides the allegations, Chinacast Education Corporation has also been dogged by internal strife with the CFO stepping down earlier this year.

The Bottom Line. At the end of the trading day, it does not really matter if Chinese education stocks Neologic Animation (NANI), China Education Alliance (CEAI) and Chinacast Education Corporation (CAST) are really frauds because in the case of the last two stocks, the market has already made its decision.

Qihoo 360′s Head of Audit Committee Caught in Accounting Scandal

2012-07-15T16:21:00.001-07:00

Deloitte abruptly resigns as auditor of former billion dollar HK apparel maker Boshiwa — stock plunges, remains halted

Before you think this can't happen to you … better think twice.

Deloitte's Boshiwa exit a precursor to more China auditor resignations (Reuters)

Trading in Boshiwa, the Hong Kong listed (1698.HK), Chinese apparel maker that owns a license for the Harry Potter brand, was halted yesterday following a 42% price plunge upon the abrupt resignation of its auditor Deloitte.

http://www.forbes.com/sites/forbesasia/2012/03/15/shares-in-boshiwa-suspended-as-auditor-resigns/

Some information requested by Deloitte is “outstanding or explanations provided by the company’s management are not to their satisfaction,” read the company's statement. Details were quite a bit more specific here:

http://hk.todayir.com/en/fileview.php?file=/todayirattachment_hk/boshiwa/attachment/20120315123201001370466_en.pdf&lang=0&code=1698

Citron notes that the largest investor in Boshiwa is Trustridge Partners, whose co-founder and Senior Partner Shujun Li is a director of Boshiwa and he is also an "independent" director and heads Qihoo 360's audit committee. Trustbridge, Boshiwa's largest investor, holds nearly 5.8% of Qihoo's stock as of its most recent SC 13G filing with the SEC, signed by Shujun Li himself.

We believe Boshiwa is a precursor for Qihoo as Citron has just realized that CEO Zhou Hongyi has been accused in the past of falsifying financials by numerous entities…including an agency of the Chinese Government.

History of Financial Information Falsified by Qihoo 360's Founder Hongyi Zhou

The balance of this post will not rehash the exhaustive work published by Citron on Qihoo 360's nonsensical financial reports for the year 2011. This report focuses on the history of its CEO's flagrant financial misdeeds.

Exposed material misstatements while being sued by China Ministry of Information Agency

In this well-publicized case, Zhou was sued by the China Internet Network Information Center (http://www1.cnnic.cn/en/index/index.htm) , the state network information center of China. But did anyone read the details? This is not a Citron allegation. The CNNIC takes orders directly from China's Ministry of Information.

The lawsuit claimed that Zhou and his company 3721.com misused the media to claim CNNIC was a privately owned monopoly, and was interfering with its lawful duties. But when CNNIC went to research 3721's capacity to pay damages, it uncovered that Zhou had been falsely claiming his company attracted investments from Japan's JAFCO and IDG, as well as CIV and MassMutual. Meanwhile SAIC business filings stated he owned 60% of the company's stock, and his wife the other 40%.

Even worse, the "About Us" section of 3721.com's company website claimed that the business had achieved "monthly income growth in excess of 20% since October 2001." However, its annual business inspection records stated its retained earnings were negative.

The article states that the representative of the CNNIC, Mr. Liu, suggested that there were only two possibilities. Either 3721.com had falsely disseminated information to investors or they had lied to the Chinese government.

http://home.donews.com/donews/article/4/47444.html

http://www.eweb.cn/news/newsshow.php?Id=63

Zhou lost the case in 2005, and had to pay CNNIC and issue a public apology. http://tech.qq.com/a/20050624/000140.htm

What happened then?

Zhou went on to sell 3721.com to Yahoo, with a contract tied to financial performance. But Zhou was rapidly forced out of Yahoo China when it became clear that his software product was essentially malware. More importantly Zhou was accused of embezzling and defrauding Yahoo.

http://archive.webpronews.com//topnews/topnews/wpn-60-20061103YahooChinaWagesWarOnQihoo.html

Citron has now obtained credible evidence about the triggering event that caused Zhou to be fired from Yahoo. He falsified the financial results of his division, upon which his own compensation was being based!!! Citron invites the opportunity to prove this statement with its unimpeachable evidence in a California court – the sooner the better.

Note-: In addition to Zhou, most of the Qihoo 360 management was taken out of 3721 and into Qihoo 360 by Zhou.

He's So Sorry

It occurs to Citron that Hongyi Zhou has been required by the misdeeds that landed him in court to have to issue no less than 4 public apologies in the last 4 years.

To CNNIC:

http://ccnso.icann.org/mailing-lists/archives/registrars/msg00915.html

To Kingsoft:

http://www.menafn.com/qn_news_story.asp?storyid=%7Bceec62aa-566d-44c6-906e-a4c687679b0e%7D

To: Tencent

http://en.21cbh.com/HTML/2010-11-22/tencent-369-qihoo-qq.html

To Yahoo:

http://www.iresearchchina.com/views/2862.html

Citron has been publishing this blog for 11 years — more years than 3721.com and Qihoo 360 have been in business combined. During that time Citron has been sued four times, and has lost none, and has never had to issue a single apology.

Auditor Note

Character is an acknowledged predictor of fraud, so much so that the PCAOB, audit standards-setting board established by the US Congress, states:

" … the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. For example, auditors may become aware of the following information that may indicate a risk factor: ''

…

Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior management, or board members alleging fraud or violations of laws and regulations."

http://pcaobus.org/Standards/Auditing/Pages/AU316.aspx

Why should you care?

Just last year, Deloitte was forced to re-examine its audit of Longtop Financial after Citron reported on the CEO's former financial misdeeds:

http://www.citronresearch.com/index.php/2011/04/26/citron-reports-on-longtop-financial-nyselft/

Before shareholders dismiss this note with "it can never happen to us", consider that Longtop had passed 4 prior audits before Deloitte was prodded to look deeper by disclosure of management's seamy track record and financial metrics that nobody else in the industry could match.

The outcome is now history, and a disaster for investors, including numerous top-tier Wall Street analysts who rallied to the company's defense.

In light of yesterday's news with Boshiwa, Citron thinks shareholders ought to consider whether Deloitte is willing to stake the goodwill of its 165-year reputation on this company, all of whose statements about its business operations contradict every major player in the industry, including numerous other Deloitte clients.

It is Citron's opinion that Qihoo 360's stock is being managed by a powerful group of insiders, but the net is closing around that conspiracy.

Today Boshiwa – Tomorrow Qihoo

A copy of this report has been forwarded to Deloitte and the SEC.

Cautious investing to all.

Citron Reports on Evergrande Real Estate Group Ltd.

2012-07-15T05:02:00.000-07:00

Deception on a Grande Scale

Citron Research is pleased to present our analysis of Evergrande Real Estate Group. This research and analysis, compiled over several months, presents the conclusion that HK:3333 is essentially an insolvent company that has consistently presented fraudulent information to the investing public.

We prove this conclusion in the following presentation.

Evergrande is not a story about the “China real estate bubble”; rather it is a tale of a company who has abused the capital markets as well as the generous lending of the Chinese Government in order to enrich one man, aggrandize his personal ego and support his pet projects.

Bribery, excessive spending, and off-balance sheet transactions are the foundation of Evergrande’s financials.

The situation at Evergrande is so murky that, within the last year, even the Chinese Ministry of Finance fined Evergrande for reporting inaccurate financial statements.

Citron wants to make one thing clear: we do not recommend shorting any of China’s state owned banks or any construction project backed by the Government of China. On the other hand, we believe that Evergrande has misled investors and represents the worst of Chinese neo-capitalism, and therefore represents a good short opportunity in relation to other exposure in the Chinese capital markets.

Whether it be the capital markets, government enforcement, hard or soft landing, the endgame for Evergrande is a certainty; the only uncertainty is the timing.

Evergrande Real Estate Research

Citron非常高兴有机会在这里与大家分享关于恒大地产集团（股票代码：HK 3333）的研究成果。在历时数月的研究分析之后，我们编写了这份报告，它将向您展示这样一个结论：恒大地产其实已经资不抵债。而在过去，该公司一直向投资人汇报虚假的信息。

我们将在以下的报告中向各位证明这个结论。

恒大地产不是一个关于中国地产泡沫的故事；它讲述的是这样的一个公司：它滥用了资本市场的支持以及中国政府慷慨的贷款，以换取一个人的中饱私囊、其自负的无限扩大，并将股东的钱挥霍在其个人的各种爱好上。

我们的研究表明：贿赂、过度支出以及表外交易支撑起了恒大的财务报表。

恒大地产的处境十分糟糕，以至于在过去的一年中，连中国财政部都因其虚报财务数据而对其进行了处罚。

Citron在这里想表明一个非常清晰的观点：我们不建议做空任何中国的国有银行以及任何由中国政府支持的建设项目；但与此同时，我们坚信恒大地产已经误导了投资人，并代表了中国新型资本主义之糟粕中的糟粕。因此，我们认为恒大是中国资本市场中一个极佳的做空机会。

无论是被资本市场所抛弃，还是为中国政府所惩罚，无论是中国经济硬着陆还是软着陆，恒大的最终结局都是注定的。唯一不确定的只有时间，为此我们将拭目以待！

Did Silvercorp Metals Exaggerate the Original Size of its Ying Mine

2012-07-15T04:50:00.000-07:00

In September 2011 I published a series of reports on Alfredlittle.com that raised a number of serious questions regarding the size and quality of Silvercorp Metals’ (NYSE: SVM) Ying mine and pointed out numerous other red flags related to their Chinese mining business. SVM’s attempts to answer my questions only led to more questions. Unable to explain all the red flags I raised, SVM instead commenced a wasteful legal campaign spending millions of shareholder dollars attempting to censor, intimidate and silence its critics, one by one, into submission.

In China, SVM filed a criminal complaint (acknowledged here in this Chinese media report) with the public security bureau in the small town of Luoyang where SVM’s key operating subsidiary, Henan Found, is based. Under pressure, the local cops aggressively responded to SVM’s complaint and arrested, terrorized, and forbid my researchers from communicating with me or performing any further research on Chinese companies.

The local cops then confiscated all my researchers laptops and extracted all the data, including a copy of my own personal address book. Soon afterwards, a large number of phone numbers and addresses from my personal address book appeared in this New York Supreme Court filing (clearly cut and pasted, including capitalization and misspellings) in which SVM tried to persuade the Court to help the company illegally gain access to my confidential bank and brokerage account info.

Since SVM began targeting its critics, Rui Feng has avoided answering the tough questions from the U.S. and Canadian media. Meanwhile in China, Feng has conducted numerous interviews defending Chinese companies accused of fraud, even those that have been delisted or halted by the Exchanges. Feng bragged to the 21^st Century Economic Herald that he had succeeded in shutting down my research effort preventing me from publishing any more negative reports on Chinese companies (link here ). Feng’s Chinese media comments made him the “hero” of all the Chinese frauds that I busted in the past and the “patron saint” of fellow litigants Deer Consumer Products (NASDAQ: DEER) and SinoClean Energy (NASDAQ: SCEI – Halted). However, the recent halt of SCEI proves that Rui Feng’s campaign to silence me has failed and that I will continue speaking the truth and seeking justice.

Today’s report is the first in a new series that will raise more legitimate questions and reveal even more disturbing truths about SVM and its management.

CLICK BELOW TO DOWNLOAD TODAY’S COMPLETE REPORT:

SVM President and COO Myles Gao’s Recent Description of the Original Size of the Ying Mine Contradicts Historical Resource Reports

A Citron Prescription for Truth on Questcor — with the Documents and Statistics the Company Doesn’t Want You To See!

2012-07-15T04:29:00.003-07:00

Posted in Citron Reports by Stocklemon on the July 10th, 2012

Citron publishes "Questcor (NASDAQ:QCOR): A Single Digit Stock in 18 Months and Here's Why"

Everyone knows the old cliché "snake oil salesmen" – hawkers of mysterious preparations promising miracle cures with secret formulations that can't be made by anyone else. Such tactics have been outlawed since the Food and Drug Act was signed into law over a century ago. For very obvious reasons, unsubstantiated claims cannot be made when marketing drugs in the U.S. to doctors or their patients. Yet Questcor(NASDAQ:QCOR) seems to have no hesitation when it spins its multi-billion dollar "snake oil sales" story – on Wall Street. Can a company tell one story to doctors and a completely different one to Wall Street? Apparently, in 2012, the answer is yes.

Let's be clear: Citron is not claiming Questcor's sole drug HP Acthar Gel is "snake oil". It is a real drug with a bona fide FDA approval. The truth is right there in black and white in Questcor's approval letter from the FDA. HP Acthar Gel is injectable corticotropin. It has one active ingredient: a well known, naturally occurring substance in humans called adrenocorticotropic hormone, or corticotropin, or ACTH for short.

The problem with Questcor as an investment thesis is that this same hormone ACTH has also been approved by the FDA as a generic drug numerous times in the last 60 years – by numerous manufacturers – with essentially the same label for the same conditions. Through the Freedom of Information Act, Citron has obtained the FDA's approval history on ACTH. If you are a Questcor investor, Citron recommends you read these file, which completely negate the "barrier to entry" claims of Questcor's CEO. Certainly the numerous analysts "covering" the company's stock with generous buy recommendations and lofty price targets have not done so – their projections wouldn't be so optimistic if they did their homework. On the other hand, it's nice to be ahead of the Street when you have the chance.

Then there's the biotech advisory newsletter BioPharmInsight, far from the company-laced propaganda on Wall Street, full of the most eye-popping quotes revealing the realities behind Questcor's claims about its sole drug Acthar … Citron guarantees Questcor Don Bailey does not want you to read this article — including his own quotes.

So why is Questcor's CEO saying these crazy things about Acthar? Because he needs to create the illusion of a barrier-to-entry to justify a purported "multi-billion dollar market opportunity" — when it simply doesn't exist.

If you are a Questcor investor, "Dr. Citron" prescribes a dose of truth about Questcor, easily digested from the attached .PDF file. Warning label: It's strong medicine. It includes:

a complete workup on the competitive threats that can cause heart seizure for Questcor's earnings at any time

a diagnosis of the insurance industry's tightening policies on the all-important reimbursement of Acthar Gel, without which Questcor gets no revenue.

an "X-ray" of Questcor management's indisputable history of printing out and exercising options while the company buys back stock — which might make you want to yell "Clear!"

This presents Citron's most comprehensive coverage of a US healthcare company since Amedisys (NASDAQ:AMED) and Arthrocare (NASDAQ:ARTC), both of which lost over 80% of their market value when Citron's stories were borne out by subsequent company admissions.

Citron's work doesn't get caught up in the "moral outrage" angle, which is all about history:

how a company takes control of a legacy drug with no market

hangs an astronomical price on it

launches a high-priced salesforce to sell it

and with no new science, no new drug pipeline, and no intellectual property protection …

gets its stock caught up with Wall Street's mo-mo crowd and winds up with a 3.5-billion-dollar valuation.

For Citron, it's all about the business, which is about the present and the future…and the truth. Comprehensive, insightful and detailed — 22 pages in all. Truth you won't read anywhere else.

Make no mistake, Questcor's business is facing severe headwinds. As usual, don't count on the company or the analysts to tell you about them… for that you'll have to read for yourself….

Click here for the Whole Story: Questcor (NASDAQ:QCOR): A Single Digit Stock in 18 Months and Here's Why