Tuesday, April 26, 2011

GREM USA (GFRE) - Is This The Next Fraud Bubble?

GFRE is trading $2.62, down 31.9% with IV30™ down 19.8%. The LIVEVOL® Pro Summary is below.


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Gulf Resources, Inc. (Gulf Resources) manufactures and trades bromine and crude salt, and manufactures and sells chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents and inorganic chemicals. As of December 31, 2009, its products have been sold only within the People’s Republic of China.

The news today is stock moving, obviously. Here's a note someone showed me from research company, Glaucus Research. I've included some snippets:


Our research included factory visits, examinations of U.S. and Chinese financial filings, and discussions with company representatives, vendors and local government officials.

In our report, we present compelling evidence that a rival, privately-held Chinese conglomerate owned by GFRE’s chairman and founder is actually the legal owner of GFRE’s factories and operating assets. We believe that, given the difficulty of litigation in China and the complex multi-jurisdictional organizational structure of GFRE, shareholders are most likely left without a remedy.

In short, investors in this NASDAQ-listed company are likely holding worthless paper in a shell company.

In addition, we present evidence that GFRE engaged in an inappropriate self-dealing transaction, the details of which GFRE intentionally concealed from the SEC and investors, that GFRE’s largest customer is privately owned by GFRE’s chairman, that GFRE engaged in dubious capital expenditures that may have been a smokescreen for transfers of cash to insiders, and that GFRE is exaggerating the size of the company’s operations. We also present evidence that the company’s CEO has a close relationship with a notorious puppet master of Chinese small cap scams.


We believe that CHFI was involved in, and may have orchestrated, one of the largest pump and dump schemes in the history of US capital markets.

Source: Gulf Resources: Due Diligence Raises Serious Questions



Let's look to the Options Montage from the close of trading yesterday (below).

A few things to note:

1. Vol was up 17.6% (or nearly 32 points).
2. The two most active lines were the May 2.5 and 7.5 puts respectively.
3. The five largest trades were May puts trading on the offer.

And of course, today, the stock catapulted down further with vol collpasing by more than 42 points (or nearly 20%). Let's look to the Options Tab (below).

We can see the OI in the May 2.5 line (both calls and puts) is substantially larger than the other lines. It looks like there were put buyers and call sellers, but not tied to stock (not a conversion).

I'm just speculating here -- but it sort of feels like someone(s) bet that GFRE was coming down hard today and they got short synthetic stock. Alternatively, the call sellers and put buyers were different people (groups). Of course, it's also possible this was coincidence or those trades were actually conversions.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see the stock's abrupt decline from $11.50 (sh) to now $2.50 and possibly headed to $0.

Did someone know? I think someone did -- but I think they published a report with all their findings well ahead of any news and disclosed their positions. This might just be a case of excellent research that went unnoticed. I'm guessing the next note from Glaucus Research might be followed a touch more carefully... Or not...

The real question: Are we at the begining of another fraud bubble? This time directed at China? In a research report I wrote, I coined the phrase "Fraud Swap." I show empirically that fraud clusters and then I show how to price that fraud. I found the results absolutely fascinating, but then again, I wrote it, so...

You can read that report here:
Ophir Gottlieb: The Fraud Swap

This is trade analysis, not a recommendation.

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