He argues these Chinese entities are frauds that egregiously overstate profit and revenue in order to attract U.S. investors who are hungry for exposure to the China boom following the 2008 market crash.
“I’ll bet against them, and I’ll write a report and I’ll publish it,” he says to the friends and family gathered for a barbecue. “I’ll say they’re a fraud, and I’ll short. But when they do go to zero, I win, but you all lose.”
It’s a startling and revealing moment for David, who is the CIO of F.G. Alpha Management, a short-bias hedge fund, and co-founder of GeoInvesting. David previously lobbied Congress and approached U.S. financial firms to sound the alarm on the wave of Chinese reverse mergers and the danger these stocks posed to U.S. investors.
“For the first two years, I gave my research away. I went to the exchanges, I went to the banks. I never shorted,” David told MarketWatch. “The reaction was, ‘And who are you?’”
So, as David continued trying to raise awareness, he also started short-selling these stocks (“busting these frauds,” as activist short-seller Jon Carnes called it), keeping the profits from the executives of these Chinese companies — and from their U.S. investors.
“Nobody took me seriously until I made money,” David said in an interview at a special event for the film, hosted by Peggy Siegal Wednesday night at Il Gattopardo restaurant. “You start catching billion-dollar companies, and now they take you seriously. I didn’t create the structure. They did. I tried to play it straight, never shorting. I’m still not comfortable shorting. I’m a value investor. I believe in the American dream. I believe in investing long.”
He makes for a complicated whistleblower, in a film full of complicated characters: The lawyer who represented the China firms. The investment banker who sold shares and issued “buy” recommendations on these stocks to his clients. Retired U.S. Army General Wesley Clark, who was chairman of Rodman & Renshaw, another firm selling these stocks.
“This is a world of gray, not black and white. You have to wonder, in order to police the markets, we’ve left it to short-sellers who have very conflicted motives,” said Alex Gibney, who directed the 2005 documentary “Enron: The Smartest Guys in the Room,” and is a producer of “The China Hustle.” (Jed Rothstein directed the film. Mark Cuban is also a producer.)
“I think Dan [David] is somebody who has a moral center, but nevertheless when you’re talking about short-sellers, do short-sellers just go after fraudulent companies, or do they go after weak companies sometimes for their own advantage? It’s complicated and yet only by getting into the gray do you begin to understand what’s really going on,” Gibney said.
This film mostly depicts events in the early 2000s, but it draws a direct line to Chinese companies today like Alibaba.
The film includes candid interviews with three victims of bad investments that wiped out their savings. What was your reaction to those interviews?
David: It was very hard to watch. It was very brave of them to do what they d
Certain news outlets and journalists covered these Chinese reverse takeovers, notably Barron’s [MarketWatch's sister publication], but this documentary presents a deep dive for the average viewer. Much of daily financial journalism is about following the hot stocks of the moment.
Going back to the complicated nature of these investment bankers, the film also scrutinizes the scaffolding around them, including politicians, lawyers and chairmen.
“The China Hustle” is released by Magnolia Pictures in theaters and available to stream here.
(MarketWatch)
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