China MediaExpress Holdings: Critics and Short Sellers Were Right!

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 was something wrong at the company. I wrote that even if some of the allegations were false or exaggerated, there were just too many unanswered questions and too many red flags of fraud.

I was attacked here by supporters of CCME. No bit of logic or common sense could sway the fans. Their arguments did not hold water. The main arguments were that I hadn’t done any due diligence on CCME (I had only looked at the work of several others), that auditors from Deloitte Touche Tohmatsu had verified the numbers (At least someone out there knows how unreliable audits are when it comes to fraud, though.), that due diligence was performed by Global Hunter Securities, and that Hank Greenberg’s Starr Investments put many millions into CCME. Surely all of these things meant that the company and its reported revenues and profits were legitimate?

I held firm to the belief that something was not right at China Media Express. On the morning of Friday, March 11, trading of CCME was halted with a code of T1, meaning material news was pending. The supporters of CCME foolishly hoped that the pending news was either a clean bill of health from Deloitte or some sort of acquisition of the company.

This couldn’t have been further from the truth. Trading never resumed on Friday, but the company issued a press release about the situation on Monday, breaking the news to their cheerleaders. All was not well. The press release said in part:

China MediaExpress Holdings, Inc. (NASDAQ: CCME) (“CME” or “Company”),China’s largest  television advertising operator on inter-city and airport express buses, today announced that the Company’s registered independent accounting firm, Deloitte Touche Tohmatsu (“DTT”) has formally resigned its engagement by the Company as of March 11, 2011. Following the receipt of the DTT resignation letter, on March 13, 2011, the Company received notice of the resignation of Jacky Lam from his position as Chief Financial Officer and director of the Company, effective immediately. As a result, CME will delay its fourth quarter earnings release and will not file its Form 10-K for the fiscal year ended December 31, 2010 by March 16, 2011, its original due date.

What caused Deloitte to jump ship? The auditors said that they could no longer rely on the representations of management. Further, issues arose during the audit, and Deloitte recommended an independent forensic investigation. The prior years’ financial statements may be unreliable, according to Deloitte.

A resignation letter from a member of the Board of Directors indicated that there were irregularities with the company’s bank balance. I find this particularly interesting, since the supporters of CCME blasted me regarding this very issue. They claimed CCME had a large sum of money in the bank, and since that bank balance was “audited” it proved the company was legitimate. I responded with a lengthy article on the procedures used to audit cash and why those procedures don’t come close to proving that a company is legitimate.

And the story has continued to unfold. Less than a week later, it was reported that Ping Luo, the analyst who supposedly performed extensive due diligence on CCME, was no longer with Global Hunter Securities. According to her reports, all was well at China MediaExpress. It would appear she was mistaken.

At the same time, Starr Investments filed a lawsuit against CCME, Deloitte, Zheng Cheng (CEO), and Jacky Lam (CFO), stating:

This action for declaratory relief and damages arises out of CCME’s repeated and systematic violations of the securities laws and regulations and its fraudulent inducement of hundreds of millions of dollars of investments…

Specifically, CCME is accused of misrepresenting the nature and extent of its business, as well as the size of the bus advertising market, and failing to comply with Generally Accepted Accounting Principles (GAAP) and overstating the company’s financial position. Starr is claiming that they were induced to invest $30 million in China Media Express based on fraudulent financial statements and untrue representations by management.

Things are not looking good for CCME.

So it’s clear that my initial opinion of “where there’s smoke, there’s fire” was right on point. I didn’t need to do my own due diligence, or spend many hours analyzing the financial statements. There were too many red flags in plain sight. We still don’t know exactly which allegations against the company are true and which are false. The particulars really don’t matter. What matters is that CCME is a fraud, regardless of the details.

It would be easy to gloat about this one, but anyone with an ounce of brains could have seen the red flags of fraud a mile away. Some supporters of CCME are eating crow, but many are still holding out hope that the company will turn out to be legitimate. Don’t hold your breath.

(Yes, I’m a little late in writing this up. Too bad.)


  1. VIT

    Just found your website this morning. Love your work. I avoided CCME early on because I saw too many red flags as well as the Starr deal that broke an investment rule that I have which is to not invest in a business who give special or exclusive deals (warrants and free shares) to some investors. In any event, great article. Look forward to reading more of your work.

  2. Pingback: Panel Determines U.S.-Listed Chinese Company Was a "Fraudulent Enterprise" : The D & O Diary

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