UPDATE: In March 2011, CFO Jacky Lam of China Media Express and the auditors (Deloitte) resigned. Deloitte said they could no longer rely on the representations of management, and they suggested an investigation was in order. Ping Luo, the analyst from Global Hunter who gave CCME rave reviews resigned. Maurice Greenberg’s Starr Investments sued CCME for fraudulently inducing it to invest $13.5 million. The stock was delisted from the NASDAQ in May 2011.

Deloitte raised the following issues: questionable authenticity of bank statements, supicioius bank confirmation procedures, existence of advertisers/customers, undisclosed bank accounts and bank loans, financial filings with the State Administration of Industry and Commerce differing from information provided to auditors, questionable authenticity of tax filing documents, cash payments to employees, and double counting of buses.

As I have found out all too well in the last two years, those who are critical of public companies risk retaliation. Retailing failure Overstock.com (NASDAQ:OSTK) has spent years perfecting their methods of stalking and intimidating anyone who dares to criticize their perpetual losses, their wackadoo CEO Patrick Byrne, the gross incompetence of management, and (most importantly) their fraudulent financial reporting.

I have a particular interest in multi-level marketing (MLM), and in publicly voicing my dislike of this bogus “business model,” have been subjected to retaliation from the companies themselves as well as individuals associated with the companies. The most vicious attack is by Medifast and its MLM division, Take Shape For Life (TSFL). I first became aware of Medifast via a small project for a client, but became interested in the company and how it was achieving extraordinarily good financial results.

For criticizing Medifast and TSFL (because of their use of multi-level marketing, which I believe is an abusive model designed in such a way that 95% to 99% of participants lose money), I got sued for $270 million. But the fun doesn’t stop there. Throughout the lawsuit, Medifast and its lawyers have been blatantly dishonest about what I have written about the company, and have made unfounded disgustingly false allegations about me, my company, and my work. All this is being done to damage my professional reputation, trash my business, and scare anyone else who might even think about criticizing Medifast and Take Shape For Life.

The latest company to threaten critics is China MediaExpress (NASDAQ:CCME).  Last week the company was accused of being a fraud by both Citron Research and Muddy Waters. The company has responded by claiming that these research companies are simply short sellers who have a vested interest in the stock price going on, and that they are considering their options. (That sounds like a threat of litigation to me.) Let’s take a look at what is being written about China Media Express, and whether those saying bad things about the company deserve the criticism and threat of litigation.

Citron Research Report

Citron begins its report on China Media Express with a simple idea: If it sounds too good to be true, it is. They go on to lay out a case that if the business of CCME was truly as they are reporting it, this would be simple to verify. After all, the business is purported to be the largest television advertising operator on inter-city and airport express buses in China.

But the company’s numbers don’t make sense. It has spent little on infrastructure, yet allegedly has grown profits from $2 million to an expected $85 million (on revenue of $200 million). Citron says that makes no sense given the Chinese advertising market. Even more important, says Citron, is the fact that “no one in China has ever heard of them.”

Citron then goes on to detail how using Google or Baidu to find information on CCME’s operating company yields no results. It makes no sense that a highly profitable advertising company (we’re talking off the charts profitable compared to the industry, apparently) is nowhere to be found in the major search engines.  Citron continues with a listing of various reports on outdoor media companies, and cites CCME’s obvious absence on the lists.

The CCME website is curiously short on actual information about the company’s operations and partners. It is alleged by Citron that the real business of CCME is pushing stock, rather than conducting business in its industry. They give more information on how CCME lacks substance, and then state:

In preparing this report, Citron has come across a plethora of information pointing to CCME being a fraud.   These include but are not limited to:  SAIC documents, Credit Rating Agency Documents, fake awards and accolades, quotes from industry professionals, and more financial analysis than this company even deserves.  The purpose of this report was to look at CCME using simple common sense to understand that the company does not exist at the scale that they are reporting to the investing public.  We are not saying that they do not operate any buses, but if you believe that the company operations are truly reflected, or even close to their stated financial disclosures, than you must go to Taco Bell for some filet mignon.

Muddy Waters Report

The Muddy Waters Report on China MediaExpress is not flattering either. The allegations are harsh and include:

  • Management is perpetrating a massive pump-and-dump
  • Revenue for 2009 was not the $95.9 million report, but is only $17 million
  • While CCME tells investors that they have 27,200 buses in their advertising network, the materials supplied to advertisers says they have only 12,565
  • More than half of the buses actually in the CCME network don’t play CCME content, but play movies
  • The company is lying about an agreement between itself (via its website www.switow.com) and Apple or an Apple distributor. Apple denies that there is any such agreement.

The primary documentation for these damning allegations includes a research report from CTR Media Intelligence that CCME commissioned. This data was compared to the kits given to advertisers, and this is where the discrepancies were found. The CTR report shows the much higher figures and appears to be a main source of information on its website. The advertising kits are apparently distributed only to potential advertisers.

Probably the worst allegation however, is the one that says none of the major media buyers they spoke to (not even the ones who represent the supposed customers of CCME) have ever heard of CCME. Ouch.

Muddy Waters says the reason for this fraud is simple: So management can cash out. Management owns more than 54% of the outstanding stock, equal to about $312 million.

If there’s any good news (or if you can even consider this good), Muddy Waters says that CCME actually does have a business. It’s just a small fraction of what they say it is.

What do I think of the Muddy Waters report? They sourced their information, and the research seems credible. At the very least, there are legitimate questions about CCME’s numbers. I suspect it’s much worse, and that Muddy Waters is right that the numbers reported by CCME are fraudulent.

What Else is Out There?

Michael Anderson writes at SeekingAlpha that China Media Express is credible and there has been plenty of due diligence on the company. He cites Starr International’s work before investing $30 million, but doesn’t say what they did. He also cites Global Hunter Securities, which reports:

During our recent trip to China, we conducted extensive due diligence and channel checks on CCME’s business. We met with the company’s entire management team including six regional managers, checked CCME’s sales contracts and bank statements, and interviewed advertising agencies, direct advertisers and bus operators. We took buses in Beijing, Fuzhou and Guangzhou to view the company’s operation and advertising programs. In addition, we met with a representative from CTR, a market research firm, and two directors at Starr International. Our due diligence results reinforce our thesis on the company and we continue to believe that CCME is a leader in its niche market. We believe the fundamentals of the business remain solid. Thus, we reiterate our Buy rating.

Anderson also cites an audit by Deloitte Touche Tohmatsu, and the fact that they are one of the four largest auditing firms worldwide. Unfortunately, audits are not designed to detect fraud, so there is no comfort in the audit results, no matter who the auditor was.

In contrast, Chimin Sang strongly criticizes China MediaExpress at Seeking Alpha. He previously wrote a three part series praising the company, but has now changed his mind.  He points out two major lies the company has been caught in, and says that those are enough to confirm for him that CCME is a fraud.

First, he says that CCME claims  it has an “exclusive license from the Chinese Ministry of Transport to install nationwide TV system on buses.” This verbiage comes from its website and promotional materials. What Sang says the company really has is not any sort of license, and certainly is not with the Ministry of Transport. Instead, CCME has a “cooperation agreement” with an “affiliate” of the ministry, and this affiliate has no power and there is no license or advantage for CCME.

Second, Sang says the company is discredited because it claimed it won the “National Prize for Progress in Science and Technology” in 2006 for its patent on “automatic control device technology of passenger car audio/ video playback equipment.” However, records of the Ministry of Science and Technology (“MOST”) and the National Office for Science and Technology Awards (“NOSTA”) do not show CCME as winning any awards in any year.

A second article critical of CCME by Sang appears even more serious. He compares revenue and tax numbers reported to the Chinese government and to the U.S. SEC, and finds serious discrepancies. In 2008, CCME reported revenue of $63 million to the SEC, but only reported $0.3 million to the Chinese government. In 2009, CCME reported revenue of $96 million to the SEC, but only reported $0.8million to the Chinese government. In 2010, it is estimated that CCME will report revenue of $214 million to the SEC, but only report $0.6 million to the Chinese government.

Which numbers are right? According to Sang’s explanation of the Chinese system of “Fa Piao” makes the numbers reported to the Chinese government pretty reliable. Basically, Fa Piao is an invoicing system that companies must use to invoice those they do business with. When an invoice is generated through this system, the company providing the services (in this case, CCME) is taxed on the income, and the company receiving the services (and paying the invoice) is allowed to deduct the invoice as a business expense. Because the company receiving the services wants to be able to take the deduction (and can’t if there isn’t an invoice in the Fa Piao system), there is a pretty good chance that CCME will have to use the system, making their income reported to the Chinese government more reliable. (Please excuse me if I’ve explained this system incorrectly in any way, as I am unfamiliar with it and therefore I am only repeating what I understand from Sang’s article.)

One writer explains why this difference exists, and claims that the reason is that most of the revenue for CCME is really generated by Fuijan FenZhong Media Co., which has some sort of agreement with CCME so that CCME “controls the activities receives the economic benefits” of it operations.” He says that one would have to check the Chinese revenue figures of Fuijan FenZhong Media Co. to explain the discrepancy in CCME’s Chinese and U.S. revenue figures.

If this explanation is true, why didn’t Zheng Cheng explain this in his letter (discussed in the next section)? He simply noted the allegation of discrepancies in revenue figures, and said it was due to different accounting rules in China and the United States. Why not provide more information if this explanation about Fuijan FenZhong Media Co. is indeed true?

CCME Responds

China Media Express Holdings responded to the allegations with a letter posted on their website. The letter from Zheng Cheng, CEO attempts to debunk the allegations point-by-point. The highlights include:

  • The authors of the reports didn’t talk to CCME management, didn’t do real due diligence, and didn’t create any financial models. (They didn’t do any of that because they’re not your friends and they’re not trying to develop a relationship with you. They’re investigating you!)
  • The authors are short sellers. They have a conflict of interest. (I hear this one all the time. Management has a conflict of interest when they report anything about their company since they want the stock price to go up. I guess then management’s reports should all be ignored as well?)
  • Our numbers are audited. So there.  (Again, audits don’t detect fraud, so there is really only a very small amount of comfort that should be felt because of the audit.)
  • The numbers Muddy Waters claims are in the advertising kit are wrong and do not agree to the numbers that are really in the advertising kit. (I would love to know the truth on this one.)
  • The claim that drivers are showing movies instead of CCME content is not true.
  • CTR’s numbers and research are credible and reliable.
  • CCME has a contract with Shanghai Bus Industrial Group for 1,892 buses, in direct opposition to the Muddy Waters claim that CCME does not have a contract with the largest bus operator. (I don’t know who to believe. Muddy Waters says Shanghai Ba Shi said they have never done business with CCME. Who is telling the truth?)
  • The number of buses they have contracts for looks lower than it really is, because there are contracts with subcontractors, who have contracts with the operators. (This one sounds plausible, yet I don’t believe it. Something doesn’t ring true about it.)
  • A contract was signed with an authorized Apple distributor, Eading Group, in December 2010. (I’d like to see independent proof of that.)
  • The bus riders are not the “sub-Greyhound demographic” that Muddy Waters claimed. It is members of households with above average income.
  • Competitors that Muddy Waters identified, who have not heard of CCME, are not in the same industry and not competitors. CCME has no competitors. (This one made me laugh.)
  • Revenue reported in China and in the U.S. is different because of different accounting and reporting rules. (I’m very skeptical about this one. The discrepancy is way too large.)
  • Claims about a lack of an exclusive license from the Ministry of Transport are simply a case of twisting words. CCME writes: “CCME has been issued a “tongzhi” by the Transportion Television Audio Visual Center, a department under the Ministry of Transport, which has binding effect on the bus operators.” (CCME seems to be playing word games of their own. This doesn’t sound anything like a license, nor does this prove that it is exclusive.)

What Next?

The issue of Chinese reverse mergers is hot right now. This article explains how and why Chinese reverse mergers are done. They are essentially a way to get smaller Chinese companies listed on American exchanges without all the hassles (and regulation) of an initial public offering.

Chris Carey over at sharesleuth.com did an extensive report on the use of Chinese reverse mergers to get listed on U.S. exchanges. CNBC stock commentator Herb Greenberg urges caution with companies doing the reverse merger dance. These are two smart people whose viewpoints and research should be considered carefully.

The SEC says it is taking a hard look at these reverse mergers, and has taken action against at least one auditing firm involved with a Chinese reverse merger. The auditors and lawyers are important to getting these deals done, and management and promoters often tout the names these firms to give credibility to these deals. The fact is that the auditors and lawyers are out to make money too, and so their involvement doesn’t necessarily mean anything good.

What do I think?

I think it’s very easy for the companies targeted by these kinds of reports to cry foul and say that the authors are just a bunch of short sellers or anonymous internet trolls. The fact is that there is no one else who is going to dig into the dirt of these companies.

Management has a vested interest in producing good numbers so the stock goes up, and there is great potential for fraud. Who is going to report the flip side of things? Of course it is going to be someone like a short seller who makes money when dirty companies are exposed.

Does that mean the dirty companies should not be exposed? Of course not. They need to be exposed, and I don’t really care who does the exposing.

I am all too familiar with the smear campaigns of companies who are upset by negative reports. I have had a hand in researching companies that had negative reports written and published about them. I have written my own negative commentary on companies like Medifast, Mary Kay Cosmetics, United First Financial, and plenty of others. I have been smeared for my efforts, and the retaliation has been harsh. I know all too well why some of the people who write these reports prefer to remain anonymous. Anonymity does not automatically make them trolls.

There are plenty of people on each side of this debate, and there are allegations that these reports have been cleverly worded to imply fraud when there really is none. Who is right?

It doesn’t matter. (Yes, I said that.) It doesn’t matter. I always believe that where there is smoke, there is fire. We are not talking about one or two allegations of impropriety, nor are we talking about some small “gray area” issue. We are talking about multiple allegations of serious problems from several different organizations. There is enough in there to make me believe things are not as management would like us to believe at  China MediaExpress Holdings.

Are some of these allegations wrong or made to appear worse than the reality? Probably. But there is still enough here that I’d be uncomfortable putting any of my own money into this company. If I were betting on them, it would be short.


  1. Joe 02/09/2011 at 7:32 am - Reply

    How about the part where Chimin used the SAIC numbers from the wrong company?

  2. Tracy Coenen 02/09/2011 at 8:41 am - Reply

    Joe – I’m not aware of that but if you’d like to provide a link to the information, I’d be interested in seeing it.

  3. Tracy Coenen 02/09/2011 at 10:47 am - Reply

    Here’s commentary that basically says CCME isn’t a fraud because they got a clean audit opinion from Deloitte:


    Clean audit opinions mean little. Audits very rarely find fraud.

    • marty 02/09/2011 at 9:12 pm - Reply

      Hi Tracy, I see here that you don’t find my article credible. I’d appreciate hearing more about your particular research in situations similar where a company of CCME’s size had a Big 4 auditor and the company was able to hide the fact that over $100m of their cash was nonexistant. Your statement that audits don’t mean much is quite interesting to me as a former auditor and an investor who believes that the audit function works well over 99% of the time, and those that aren’t caught have fact patterns quite inconsistent with this case. I’m not trying to be abusive at all. I’d like to know the basis for your conclusion so I can research it further.

  4. George 02/09/2011 at 12:18 pm - Reply

    Tracy, please take a look at this website.


    You’ll find evidence supporting claims that Citron, Muddy Waters and Chimin Sang are actually the ones doing the fraud. In Sang’s latest article there is evidence that he falsified the documents he uses to make his case. You should know that the SEC has been contacted and has been receptive to investigating this matter and is looking into this fraud being committed against CCME so if you are interested in investigative reporting, this is a story for you.

  5. George 02/09/2011 at 12:20 pm - Reply

    What has taken place is a “reverse” pump and dump where shares have been strategically shorted, then a negative “research” article is released to drive the price down creating tremendous profits. As you will notice in the “research” article place by Muddy Waters, they state: Muddy Waters, LLC …has a short position in the stock …, and therefore stands to realize significant gains in the event that the price of stock declines.

    What is frightening is that they don’t even guarantee that what they say is true: “information is presented “as is,” without warranty of any kind – whether express or implied. Muddy Waters, LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use”

    You can view the report and their disclaimers here.


  6. Tracy Coenen 02/09/2011 at 12:49 pm - Reply

    And management has a long position in the stock, so they stand to realize significant gains when they provide positive information and the stock goes up.

    That disclaimer is standard legalese, and doesn’t bother me in the least.

    • Carl 02/09/2011 at 1:52 pm - Reply

      Here is a discussion between Glen Bradford and a friend of his regarding the likelihood of CCME being a fraud.

      The participants in the discussion do not matter, just the matter of the discussion. I think they do a good job of discussing the different angles of a potential fraud, and why none of them are likely.

      Namely, if the company is a fraud, the CEO stands to lose a significant amount of money, per the incentives in the deal with Starr.

      It is relatively long, but hopefully you are willing to spend more than 30 seconds researching the company before coming to a conclusion.


  7. lannychiu 02/09/2011 at 1:31 pm - Reply

    While the credibiity of the Chinese RTO space has certainly been called into question, most specifically by the huge accounting fraud at RINO, one does need to look carefully at the accusations leveled at CCME.

    The 3 major issues I see with the most recent reports by MW, and Sang are these.

    1) It appears that the initial tax documents cited by Sang may have been forgeries, as they;

    – Lack the official stamp required on all Chinese tax documents

    – Appear to be a 2008 tax form, filed for the 2010 Q4 period

    2) Their appear to be some problems with the PDF released by MW. In particular the author is “Kathy Block” rather than someone at CCME.

    It is possible that Carson Block simply downloaded the file, copied the data by hand, and created a new PDF on his wife’s computer with the original data, but it does not appear that this is the unadulaterated data he initially received. Something seems wrong with this.

    3) MW made a substantial claim about the Apple contract with CCME being a blatant lie. This appears to have been addressed by management.

    Like everyone I would want to see frauds removed from the market of every stripe, but it is not clear to me that CCME is obviously fraudlent. These are significant issues with the most recent reports that do not appear to pass the smell test.

  8. Steve 02/09/2011 at 1:35 pm - Reply

    So they fooled Deloitte, Forbes, Starr ?

    Short interest and puts sky rocket before every hit piece.

    Forged documents?

    Ridiculously low revenue projections. How did CCME manage to sponsor the China Open tennis tournament?

    Andrew Left recently arrested.

    No company is safe if these guys aren’t dealt with severely.

  9. Lee 02/09/2011 at 1:38 pm - Reply


    Hopefully by now you will have visited ccme-info.xango.com and are familiar with the string of falsehoods perpetrated by Messrs Left, Block & Sang.

    I urge you to familiarize yourself with Mr Block’s track record.



    You don’t seem naive but I find your apparent belief that these “different organizations” all just happened to issue their reports concurrently (when the stock was on RegSHo)hard to fathom.

  10. Tracy Coenen 02/09/2011 at 1:47 pm - Reply

    Lee – Don’t presume to know what my “apparent belief” is or is not. I have made no comments about the issue you cited that I have an “apparent belief” about.

  11. Salty dawg 02/09/2011 at 1:49 pm - Reply

    Tracy, Citron claims its a phantom company.
    MW claims CCME has committed outright lies.
    Sang has been outed as a forger of documents, at the ones he used.
    Four(4) people, all of questionable repuatations, one convicted of Securities fraud already. All four of these peoples claims have been debunked and refuted by not only the compnay itself, but by many other over the internet. The difference is that there is more eveidence of CCME being legitimate and money-making than what these 4 people claim.
    You have Big 4 auditor , which matters not to you. How about Goldman Sachs, Morgan Stanley, Oppenhiemer, CA, PA and recently NC public employees along with 46 others as institutional investors.
    Forbes, Mike Koza, and many others have conducted DD and invested accordingly.
    Think these guys are all duped and the 4 aforementioned people have the wherewithall, the knowledge and skill to find what ALL THESE INVESTORS missed?
    Citron(Andrew Left)convicted of securities fraud.
    Muddy Waters supposed office in China does not exist.
    Sang used either acquired forged documents or forged them himself. Either way they have all been disproved.
    You dismiss the Big 4 auditor with the wave of a hand. For CCME to be fraudulent, Delotite had to be complicit.
    Appreciate your article but one musyt look at all sides instead of just slanting towards the already known unsavory characters of Citron, MW and Mr. Sang.
    You do your readers a disservice by NOT being investigative and looking yourself which you obviously have not. If so, you can easily find all the disproven garbage spewed by these so called “research firms”.
    Any look around the internet with any degree of ability will yeild positive disproof of what these hit piece people do.
    And should you not believe that, then where did these guys get their information about phantom companies, fraud, SAT/SAIC from. Oh thats right the internet. Not ONE of these people went to China and looked at the company or its operations. But of course they don’t mentionm that.
    On the ground DD has been performed by many, WCTbills is the latest, boots on the ground in China, riding the buses that supposedly they are only 60 or so of.
    Your article slants just like the hit pieces you are writing about.
    Me, I’ll stick with the 53 Institutions including Goldman Sach and Morgan Stanley, the likes of Mike Koza and Forbes before any of these fly by night, deceptive and manipulating little people.

  12. Jerry Millstone 02/09/2011 at 1:56 pm - Reply

    Tracy – Speaking of disclaimers, your website does not have a disclaimer, privacy policy notice or terms and conditions. You should look into this as this might be required.

    Do you accept payment from individuals or companies to research or report on public companies? Have you been compensated in any form for your review of the articles about CCME? Do you invest in the securities of the public companies that you write about, or buy or sell options or other derivative contracts? Do you sell short any of the companies that you write about?

    I am not accusing you of doing any of the above, I just think that it is important to know.

    You referenced Muddy Water’s disclaimer, and how it doesn’t bother you. It bothers me, since they explicitly state that they may go long a security that they have a “strong sell” on. That seems odd, doesn’t it? It also bothers me that they produce “research” but disclaim anything that they produce as Research. Huh? That’s right, they are distributing research but claiming that they don’t provide research.

    There are many questionable things about Andrew Left, Carson Block, Chimin Sang and others’ methodology. For a forensic accountant to dispassionately publish an article about this situation with seeming regard for the above short-sellers is surprising to me. For these people, the end justifies the means, no matter how criminal.

    Thank you for allowing me to respond to your article.

  13. Lee 02/09/2011 at 2:09 pm - Reply


    You wrote:

    “We are talking about multiple allegations of serious problems from several different organizations” as validation of the smoke.

    Lets say looking at the whole picture I question the independence of the various sources. Particularly as I hope you will have ascertained by now that the documents they provide as support for their arguments have been demonstrated to be either not as they claim to be or to be downright forged.

    You will note that Mr Sang’s second article has been removed from Seeking Alpha due to concerns about the veracity of the information provided.

  14. Tracy Coenen 02/09/2011 at 6:12 pm - Reply

    This article was written last evening, and posted this morning. I did my best to examine the most relevant websites and commentaries, but obviously could not examine all sites. For one, I don’t follow message boards. In addition, it’s simply impossible to look at all sites. I realize that there may be new commentaries and facts that are being revealed following the writing of this article. Obviously, because they came after the article was written, they’re not discussed in the article. I may or may not do a follow-up article. I have no obligation to do a follow-up article, nor do I have an obligation to do any further investigation.

    Jerry – I have made all required disclosures.

    Lee – Please don’t take a small portion of my writing and use it to make it seem like something it’s not. Quote me in full. I said:

    “We are not talking about one or two allegations of impropriety, nor are we talking about some small “gray area” issue. We are talking about multiple allegations of serious problems from several different organizations. There is enough in there to make me believe things are not as management would like us to believe at China MediaExpress Holdings.”

    Mr. Sang’s second article has been removed and replaced with the following statement (which is different than your claim above): “This article has been removed pending the author’s response to a dispute about its accuracy.”

    • Jerry Millstone 02/09/2011 at 7:20 pm - Reply

      Tracy – I reviewed your site and could not find anything resembling the disclosures requested to whit: whether you have any financial interest in this situation. Would you care to respond more definitively?

  15. Tracy Coenen 02/09/2011 at 7:55 pm - Reply

    Jerry – I understand you requested certain disclosures. My response is that all required disclosures have been made.

  16. Jerry Millstone 02/09/2011 at 8:13 pm - Reply

    I must infer by your response that you are being compensated or hope to be compensated for your negative views about CCME. Sad that you hide behind a thin veneer of impartiality.

  17. Tracy Coenen 02/09/2011 at 8:15 pm - Reply

    Jerry – Your inference is incorrect. You see no disclosures about CCME because I have nothing to disclose.

  18. Martin 02/09/2011 at 9:10 pm - Reply


    I understand as a forensic accountant and fraud examiner it is in your business interest to jump on any accusation of fraud and run with it. Indeed I applaud you for chosen line of work.

    However anyone who has researched this particular issue in any sort of depth would realize you are tilting at the wrong windmill.

    I note that you report the articles claiming fraud verbatim but found time to write witty remarks beside most of Zheng Cheng’s comments.This does not do you justice and invites comments such as those written above.

    Your conclusion “The latest company to threaten critics is China MediaExpress” drawn from the statement “that they are considering their options” is quite a stretch. I think it is more likely that they are hoping the SEC or the Nasdaq stock exchange intervene.

    In conclusion very incomplete research (most of the rebuttals have been available the day of the attack articles) and biased conclusion.

    I for one will be filing a complaint with the SEC including this article as an example.

  19. Tracy Coenen 02/09/2011 at 9:15 pm - Reply

    Martin – No, it is not “in my business interest to jump on any accusation of fraud and run with it.” I took a look at the information I found, I added comments of my own, and decided that there is enough there to concern me about the company. Just because I drew a different conclusion than some, doesn’t mean my conclusion is biased. Indeed, I have no bias regarding CCME. Please do contact the SEC, and feel free to provide them with this article.

  20. Tracy Coenen 02/09/2011 at 9:31 pm - Reply

    Marty – As a forensic accountant, I have seen time and again that financial statement audits do not detect fraud. They are not designed to detect fraud, and therefore they most often do not detect fraud. You can read more about my thoughts on this issue in these two articles:



    • Marty 02/09/2011 at 9:59 pm - Reply

      I’m sorry Tracy, I guess my question was too vague. I’m also a CPA and have done my share of forensic accounting though not as a career. I’m asking a specific question that pertains to the article I wrote which you appear to believe is not credible based upon your expertise. I’d like to hear more to help me understand why. This situation in a vacuum as opposed to other far more complicated audits is actually quite simple. The Muddy Waters report claims that the company’s 2009 audited financial statements overstated revenues and therefore assets by $78m. Their P&L shows net income of approx $42m which translated into a somewhat higher op cash flow resulting in a Y/E cash balance of $57m. So for the fraud case to exist you must believe that Deloitte would not catch an overstatement of cash of 80% in a relatively small company with limited transactions and where cash is the dominate asset on the balance. Moving beyond the audit, the fraud claims grow in magnitude such that they are now claiming that for the reveiwed 10Q Deloitte was unable to catch a $100m infusion of cash from a nefarious underground agency to prop up the balance sheet to shield the fact that revenues were dramatically overstated and that the cash balance of $170m was ficticious. I know the audit process fairly well and don’t understand how someone with expertise in forensic accounting could serious agree this is a reasonable possibility.

      That was the premise of my article so I would appreciate your educating me so I can properly edit my article if appropriate and extend my skills to take advantage of your knowledge.

      I agree with the assertion that audits are not assured to catch fraud. They do however test transactions and get independant confirmation of transactions and balances from relevant parties and when dealing with banks the process is much easier as they aren’t as easy to fake as for instance a supplier or customer. Anyway, I’m clearly going on too long here. Appreciate your insights.

  21. Tracy Coenen 02/09/2011 at 10:12 pm - Reply

    You say that audits are not “assured” to catch fraud. In truth, audits are not designed to find fraud and most often do not find fraud. The two articles I linked to should give you sufficient information about how and why this is the case.

    You say “they are now claiming”…. I don’t know who “they” is, but I suggest you chat with them about their allegations and whether or not they could be true in light of the audit by Deloitte. I have not taken the time to examine these allegations made by “they,” and so I don’t have any comment on them right now.

  22. Marty 02/09/2011 at 10:24 pm - Reply

    Sadly they don’t tell me anything. I’ve read them and it’s a rehash of what I heard in auditing classes in the early 70’s. It’s not real world auditing nor any forensic techniques to uncover it when it exists. The following comment is at least acknowledging what I found out during my 20 years of experience in finance. Auditors don’t design their entire audit to uncover fraud where management are complicit. The do look for signs that it may exist on every audit undertaken. That continues to be the point you choose to avoid. Any effort to look for the potential for fraud or the nonexistence of the majority of cash on the audited balance sheet would have uncovered what has been suggested by those supporting the fraud theory. This site included.

    The guidance for auditors is continuously evolving as the accounting profession acknowledges that fraud is becoming a bigger issue for clients. All of this alphabet soup can be boiled down to the fact that it is management’s responsibility, not the auditor’s, to prevent and detect fraud. The auditors must consider fraud throughout their procedures, but they do not have an absolute responsibility for the detection of fraud.

  23. Darren 02/09/2011 at 11:05 pm - Reply

    I am not sure how you conduct your research, but given the high profile examples you list on your website I suspect your efforts are exhaustive. Unfortunately, in the case of CME, you succumbed to temptation (or profit from advertising trying to get in on the web traffic) and took the easy route by parroting what was said in recent inflammatory, if not fraudulent, articles to support one side of the argument and entirely ignoring the protagonist! It is unfortunate that you don’t read ‘message-boards’ because IHUB has produced hundreds of pages of peer-review level due diligence on CME, and instead you relied on blog posts (which is really a single-person message board) from nefarious individuals. I’ll remind you again that your reference section for this article is empty. There is a well known feature on message boards for persons who use poor taste, submit poorly written posts, or poor use research, and its called – ignore.


  24. Tracy Coenen 02/10/2011 at 12:26 am - Reply

    Marty – I’m sorry that you don’t understand how and why audits fail to find fraud, but I’ve done my best to help you. The idea that auditors look for signs of fraud is nice. The idea that they have to consider that fraud may exist is nice. The reality still remains that they rarely actually find fraud.

    Darren – What research? What high profile examples? What do you mean by exhaustive?

    • Marty 02/10/2011 at 7:58 am - Reply

      I’ll leave you be then. I guess your years in the field conducting audits gives your the edge and justifies the condescending tone. In closing I also dispute your definitive statement that audits don’t discover fraud. I’d ask you to defend the statement with the source of your findings but I’ve been unable to get to you comment on by previous questions so won’t bother. I would agree that they don’t find headline-producing fraud. That’s because when they uncover it they deal with it or resign the engagement They don’t issue press releases to let the world and you know.

  25. Darren 02/10/2011 at 12:47 am - Reply

    What research? what you should have performed before quoting fraudulent short-sellers

    What high profile examples? Like the one you lead with in the first sentence (overstock.com) of this article

    What do you mean by exhaustive? You are either a paid-for service to promote these short-sellers, or you are just piggy-backing off the web traffic generated by this drama to generate revenue or at least increase site visibility

  26. Tracy Coenen 02/10/2011 at 12:54 am - Reply

    Darren – My research on the companies I mentioned was not “exhaustive.” I did targeted research on those companies based on issues that I wanted to write about.

    I think you have missed the point of this article, as have several others who have commented. I saw the CCME story, thought it was interesting, took a look at the information and opinions I found, and decided to write an article on the information I found. I included my commentary and reaction to the things I read. It’s as simple as that.

  27. Alan 02/10/2011 at 2:00 am - Reply

    Thanks so much for your interest in this matter of CCME and their accounting! As a forensic accountant, you’re exactly the kind of person I’d want to be looking at this issue, perhaps you can shed some light on it.
    I’ve been invested in CCME for over a year, and I now have a significant percentage of my wealth at stake, so I am extremely interested in getting a “skeptical” point of view on the possible accounting issues. I’ve been looking through the comments, and I read your articles that you referred to above with great interest.
    – The first article seemed to focus mostly on management’s concerns with ability of an audit to detect small-scale fraud, involving small transactions from someone with intimate knowledge of the company’s accounting procedures. It seems very reasonable that any audit would have a hard time detecting this, but I’m having a hard time understanding how that is relevant here.
    – The second article is slightly more applicable. The gist of this one is that there are mechanisms, such as manipulating accounts receivable and warrant reserves, which allow management or others to siphon off money relatively easily by disguising embezzlement as a legitimate business expense. In addition, an important point is that audits are usually done by young accountants who may not be familiar with the various methods of concealing fraud.

    After reading these two articles, I’m having a difficult time drawing anything from them which is applicable in this situation. (Other than perhaps that “audits are not designed to find fraud”, which isn’t particularly helpful or specific.) In this case, the company claims to have $170 million in CASH in the bank as of September 2010 (www.ccme.tv/eng/ir/irprofile.php) What I want to know from you, as a forensic accountant, is HOW can this be faked? I’ve found that in situations like this it is helpful for instructional purposes to have a hypothetical means by which $170 million could be “engineered” to be present in a company’s bank accounts. Perhaps you can suggest a means? What kind of standard procedures are followed by accounting firms to ensure that the money in the bank account comes from a legitimate business source? As you said in your article, during an audit, debits & credits are looked at and added up – basically the math is checked. Are there any checks by an auditor to ensure that cash credits are from a legitimate business transaction? Or could a (generous) outside source provide regular surreptitious infusions of cash to boost the cash balance? I suppose, in a sense, this would be the reverse of what you suggested in your first article, where a low level employee embezzled hundreds of thousands…except multiplied up by a factor of 100!!!! What would the motivation of such a benevolent outside party be? It seems like they would have significant risk…
    I would greatly appreciate it if you could go through the company’s 2009 10-K and recent 10-Q’s in great detail to see whether you can find a way to explain how this level of fraud could take place. From my reading of the latest 10-Q, I can see that this past year $46 million has been provided by financing activities (exercise of warrants(+), issuance of shares(+), cash paid out in Share Exchange Agreement(-). But there is $69 million of additional cash to be accounted for this year, allegedly from operating activities. How would this be faked?
    I still have time to get out of this investment if indeed it is a fraud. But having traveled to China, and working for a Chinese company, it seems completely conceivable that such a profitable business could (and should!) exist. It is an amazing country… I don’t put a lot of weight in the reports from Muddy Waters, Citron, and the Chimin guy, because they all have vested interest, and the quality of the reports was so low as to be nearly laughable (if people weren’t losing millions of dollars…). But that is not to say I am not skeptical about CCME in general. It would be invaluable to have a forensic accountant like yourself do an in-depth analysis of the cash flows of CCME, and provide specific information of how fraud could be taking place. If possible, perhaps you could draw on your experience and tell a story of a company you’ve dealt with in the past that built up an enormous, verified cash balance, which turned out to be fake. Then we can look at what happened in that situation and see if we can apply it here.
    I too, have perused the excellent message boards online, and I’ve seen plenty of analysis and discussion about this company. I’m sure people would love for you to weigh in with some details…
    This has been an excellent introduction to how a forensic accountant looks at this kind of situation; I look forward to a potential second article with some actual research and analysis on CCME!

  28. Tracy Coenen 02/10/2011 at 8:20 am - Reply

    Marty – My tone is no more or less condescending than yours. You think it is not possible to fool a big auditor, I know from my work that it is not only possible, it happens all the time. I see it happen over and over and over. I routinely have engagements in which I am investigating a fraud for a company which had annual audits by reputable accounting firms. This, my friend, is the source of my findings, in addition to all the lawsuits I see against auditors who missed big frauds.

    Alan – If you’d like to retain me to do the in-depth analysis you described, please contact me privately.

    • marty 02/10/2011 at 9:06 am - Reply

      Tracy-Please don’t confuse me again. I don’t, nor ever have, claimed that auditors don’t get fooled or that that catch all or most frauds. That’s not the overriding intent of their function. I did attempt to get your insights on a fact pattern similar to this one to determine why you found my conclusions not credible. I do not believe this is a high transaction volume, large or convoluted business. The risk of fraud can fairly easily be quarantined to the verification of cash balances and sources of receipts from a relative small customer set. Writing a piece that describes how the audit procedures of a Big 4 firm wouldn’t likley catch fraud in a situation similar to this would be enlightening.

  29. Tracy Coenen 02/10/2011 at 8:33 am - Reply

    I will try to write a piece this week about how auditing the cash balance can fail to find fraud.

  30. Alan 02/10/2011 at 12:31 pm - Reply

    I’m looking forward to reading your piece on how auditing the cash balance can fail to find fraud. If possible, please try to address how major fraud can take place…that would be relevant in this case, because that is what is being alleged. When I say major fraud, I mean, for the sake of argument, that the cash balance is exaggerated by greater than a factor of two. The actual allegations in this case are more substantial than that, but I think a factor of two should be sufficient, on a scale of 10’s of millions of dollars.
    And of course, please focus on specifics and give examples if possible. One of the major issues with all of the allegations on other websites (aside from the outright fabrications) is that they are deliberately vague…it seems to be part of a strategy, to be honest. So some specificity on methods of accomplishing fraud in a situation like this would be helpful.
    If I like the article, who knows, maybe I would retain you for a more in-depth analysis. Prior to hiring someone, I always like to get an idea of how they address specifics of a situation, because it’s a great measure of the person’s competence and attention to detail. And as you say, forensic auditing is all about the details….

  31. Tracy Coenen 02/10/2011 at 1:31 pm - Reply

    Alan – I suggested retaining me only to point out how silly it was that you were suggesting I do such a high volume of work, which is usually reserved for paying clients. You and I both know that you have no intention of retaining me, even if you were able to meet my criteria for client acceptance. I will not be treating any articles I write as auditions for you.

    • Alan 02/10/2011 at 4:21 pm - Reply

      Tracy, all I can say is…wow….
      How was I suggesting you do a high volume of work? I didn’t think I addressed that in my first post, one way or the other.
      I was serious in my post, and I took your reply seriously. If you don’t want the work or cater only to the upper crust, that’s fine with me. I am certainly used to making my own investment decisions, and there are plenty of helpful folks out there online who can help with that after they are properly vetted.
      Thanks for your time. Sounds like there have been some posts out there today showing similar situations in history which I can examine to see whether they’re applicable here.

  32. […] on February 10th, 2011 Earlier this week, I posted an article about China MediaExpress Holdings (CCME) and the allegations of fraud that were leveled recently against the company. I took a look at some of the commentary out there, […]

  33. Nate 02/10/2011 at 2:22 pm - Reply

    To all the people who’ve responded saying it’s impossible to fake cash to auditors I’d suggest you refresh your memory with the Satyam fraud. Satyam claimed to have $1 billion in cash in the bank that didn’t exist, PWC one of the big 4 was the auditor. How did they conduct this fraud, they claimed the cash was there and it wasn’t, the auditors never checked it, they felt they company was good on it’s word.

    Here is a NYT article describing it: http://www.nytimes.com/2009/01/09/business/worldbusiness/09iht-09outsource.19206831.html

    My general philosophy of investing is that there are enough opportunities out there why spend my time invested in a company with a lot of red flags and try to justify it. There are plenty of companies that don’t generate red flags to invest in.

  34. Tracy Coenen 02/10/2011 at 4:25 pm - Reply

    In addition to the list of questions you wanted me to answer and explain for you, you said: “I would greatly appreciate it if you could go through the company’s 2009 10-K and recent 10-Q’s in great detail to see whether you can find a way to explain how this level of fraud could take place. ”

    Great detail = lots of work

    My business is not “catering to the upper crust,” but I do have criteria for the clients that I accept. It does not appear that you and I would be a good fit.

  35. […] on February 23rd, 2011 A couple of weeks ago I posted an article examining some of the allegations against China MediaExpress Holdings (NASDAQ:CC…. I also discussed the company’s response, as well as the response of writers who are […]

  36. […] on March 12th, 2011 Last month, I wrote a piece on China MediaExpress Holdings (NASDAQ: CCME) and the allegations of fraud by researchers at Citron Research and Muddy Waters. The story grew quickly with the reaction of the […]

  37. […] on March 27th, 2011 In February, I wrote about China MediaExpress Holdings Inc. (NASDAQ:CCME) and several fraud allegations that had surfaced via researchers at Muddy Waters and Citron Research. After looking at the allegations and the support (or lack thereof), my conclusion was that there […]

  38. TFF 05/30/2011 at 1:23 am - Reply

    The comments on this article from those disputing Tracy’s work are fantastic and schadenfraude (sp?) inspiring.

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