Friday, June 17, 2011

Harbin Electric (HRBN) - Stock Collapse, Stock Pump Allegations... And Fraud Clusters

HRBN is trading $7.62, up 9.1% with IV30™ up 0.7%. The LIVEVOL® Pro Summary is below.


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For those that don't know, HRBN collapsed more than 50% yesterday as vol popped more than 155 points. The Livevol® Pro Summary as of the close is included below.

The news is fascinating. First, note that HRBN is one of many Chinese stocks traded on the US exchanges that's associated (fairly or not) with what seems might be an overwhelming fraud in Chinese accounting for its public companies. The stories are sad and at times, I must say, unbelievable -- to the point where auditors (like Deloitte) are receiving threats for refusing to sign off on audit results.

In HRBN's case, the focus is more on a highly unusual takeover to private bid for $24. Yeah, $24, and the stock was trading $14, and is now trading $7 (ish). So who is this takeover bidder that has no credibility?...

Mr. Tianfu Yang

And who is Mr. Tianfu Yang?

The CEO and Chairman of HRBN.

No reason for him to have credibility?...

Here's the news report from last October:

[HRBN] today announced that its Board of Directors has received a proposal letter from its Chairman and Chief Executive Officer, Mr. Tianfu Yang and Baring Private Equity Asia Group Limited for Mr. Yang and an investment fund advised by Baring to acquire all of the outstanding shares of Common Stock of Harbin not currently owned by Mr. Yang and his affiliates in a going private transaction for $24.00 per share in cash, subject to certain conditions. Mr. Yang owns 31.1% of Harbin's Common Stock.  According to the proposal letter, an acquisition vehicle for the purpose of completing the acquisition will be formed and the acquisition is intended to be financed with a combination of debt and equity capital.
Source: PR Newswire


The news yesterday that tore the stock down was based on a research note from Citron (a snippet is included below):

"It is Citron's opinion that it is now time for the SEC to halt this security," said the firm, which has a disclaimer saying it does not guarantee that it's providing all of the information that may be available about the securities it writes about and that its principals "most always" hold a position in the securities it profiles on its site.


"The future of Harbin's stock price is currently propped on the crutch of a purported $24 buyout offer from its Chairman / CEO, which Citron believes is a sham," firm states. "With time stretching seven months since first proposed, we still have no binding, official takeover bid filed in an 8-K, just a few press releases, and now the boilerplate document of a purported supporting loan that seems half baked, as discussed in the last report."

Oh... That doesn't sound very good... And by the way, what do they mean by a halt?

Look at Chinese stock LFT - they halted on 5-31-2011 and haven't traded yet. Yeah, going on three full weeks.  What do you do if you're short options?  Hell, what do you do if you're long options?...

As for HRBN, let's look at the Skew Chart -- see waas sappening.

We can see the monotonic term structure -- with vol elevated in the front and then dropping to the back. Right now Jul vol is 327, Sep is 243 and Dec is 196. Btw, the Jun 5 puts (yeah, the ones expiring in six hours) are still dime bid and have traded to $0.15. That's ~ 800 vol.

Here's the Options Tab -- we can see the action and the vols.

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 collapse yesterday and the vol explosion. We can also see this "propping up" phenomenon -- that is, the stock kind of hung around the same level and didn't do much... ya know , until yesterday.

So after all this, what is HRBN saying? Here you go:

(Reuters) - Harbin Electric said a research report that pulled its shares down by more than 50 percent on Thursday, was factually incorrect.


The CEO and the company reserve the right to bring legal actions against Citron Research for these erroneous allegations, Harbin said in a statement.

Harbin could not be immediately reached for comment.

Source: Reuters

Possible Trades to Analyze
I have so many trades that seem interesting and worth examining -- but there's one thing, here. A halted stock means halted options and that means, I pass -- completely.

Well... I am short the baby puts in Jun (but I didn't sell today).

For the record, I have stated that fraud clusters, so there's likely more to come. I've demonstrated this rigorously through empirically data and even showed how portfolios can be immunized from fraud risk with some fancy mathematics.  For more information on that report,contact me.

This is trade analysis, not a recommendation.

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1 comment:

  1. I follow Citron because I think they do real research that Wall Street has "forgotten" how to do; however, having said that, here's what really puzzles me.

    Immediately prior to his offer, the CEO's stock was at ~$20 and his share was worth about $180mm. He made a reasonable 20% bid premium, so

    (1) what was the point if the bid was fraudulent?
    (2) was he really planning to unload his stock at $24, garnering "only" an extra $36mm and if so, is he really stupid enough to believe he could unload his ~1/3 of the company WITHOUT depressing the stock?

    Now the CEO is worth only about $70mm. There was a $100mm "PERSONAL cost to him for his fraud", if that is what it is. Further,

    (3) if he was willing to buy at $24, isn't there some way he could find some financing to be buying ["the crap out of"... :-) ] his stock at $7-8?

    It would almost make more sense to me that he set this all up to crash his stock and buy it on "the cheap", but who knows.

    I took "a flyer" on this stock after the 1st Citron report, knowing it was a gamble because the volatility was too attractive NOT to sell. Like Ophir, I have SO many ideas... but I'm passing for now too (God, please quit tempting me with a "time bomb butterfly"!).