China Biotics' Fraud Casting Doubt on All Chinese RTOs
USINFO | 2013-11-15 13:13

China-Biotics (CHBT) appears to have committed malicious accounting fraud to intentionally fool its auditor, BDO Limited, according to the company's partly hilarious but mostly disturbing 8-K filed Thursday. China-Biotics' auditor resigned, and issued one of the more shockingresignation letters I've ever read. Among the highlights, BDO claims that China-Biotics committed "illegal acts" including document forgery and an elaborate scheme in which BDO's auditors were directed to a "suspected fake website" when BDO attempted to verify China-Biotics' cash balance with the company's bank. BDO also states that, among other things, China-Biotics forged sales documents and mis-stated interest income.

The fallout from BDO's letter has been fast. China-Biotics' CFO has already resigned, and the NASDAQ is already moving to remove the company from its exchange; shares are likely to be delisted July 5th. While China-Biotics has long been a suspected fraud, it is surprising just how far China-Biotics was willing to go in support of its faked numbers.

In particular, it is amazing that China-Biotics would go to the trouble of making a fake bank website for BDO's auditors to visit. That is the sort of shamelessly fraudulent act one associates with Nigerian money-wiring scams rather than NASDAQ-listed companies. If China-Biotics was willing to go this far -- and it was able to fool a respected auditor such as BDO for a time, what other similar bank account related frauds will be discovered? While we've known for months now that fraud ran deep across the sector, this level of sophisticated deception must make us probe even more deeply into companies that claim high cash balances.

China-Biotics claimed to have $132 million in cash, or nearly $6/share in cash, (more than 150% of the company's market value before it was halted.) This supposed cash formed the core of bull's hopes for the stock. As one can see in this bullish piece on China-Biotics, the number one reason to be excited about the stock was because the company was going to launch a dividend.

 

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