Investors betting against Chinese companies listed in North America have wielded a big bat in the past year, bringing many of their targets to their knees with allegations of fraud and wiping out billions of dollars of shareholder value.
In the past few weeks, though, the grip of the short sellers - who borrow stocks and then sell them in hope they will decline so they can buy them back at a lower price - has lessened.
The shares of some companies accused of having accounting issues or other problems have soared and short sellers have had to take losses or have reduced their bets.
On Oct. 29, shareholders of Harbin Electric voted to accept a buyout by its CEO Tianfu Yang and private equity firm Abax Global Capital at $24 a share. That was more than four times the $5.82 the shares touched in June after Andrew Left of Los Angeles-based Citron Research raised questions about Harbin's management and how Yang had obtained a loan in the past. Harbin has denied the accusations and Yang completed the acquisition last week.
Shares in Toronto-listed Chinese silver miner Silvercorp , were pummeled in September after the company said it received an anonymous letter accusing it of fraud and as financial blog - alfredlittle.com - weighed in with allegations of accounting irregularities. But the company insisted the claims were false and the stock has rebounded to above its price before the controversy.
And in another case, shares in mobile handset chipmaker Spreadtrum Communications , are trading near all-time highs, more than triple a 52-week low hit in June after Carson Block's short-selling firm Muddy Waters raised questions about the company's financial reports in an open letter to management. The company said the allegations were "groundless."
The turnaround suggests that while a number of Chinese companies clearly did have dubious accounting or other major problems, there may have been others unfairly tarred with the same brush.
The successful Harbin deal shows that short sellers will have to "raise their game," said Bill Bishop, a Beijing-based consultant and analyst.
He said that up until now if a short seller put out a negative report on a Chinese company, the assumption had been "to shoot first and ask questions about whether or not it's a correct report later." That may now change, he said.
In a number of high-profile cases shareholders would have benefited from listening to the short sellers.
Some big name investors, including hedge fund manager John Paulson, lost heavily on Toronto-listed Chinese forestry company Sino-Forest Corp, whose shares are now suspended after Canada's main securities regulator, the Ontario Securities Commission, said preliminary results of its own probe determined that fraud accusations by Block's Muddy Waters appeared to have merit.
It marked the biggest Chinese company take-down by a short seller. The company was valued at C$5 billion ($4.96 billion) before the report and when trading was halted its value was just C$1.18 billion.
There were also big losses for investors in financial technology company Longtop Financial Technologies Ltd., whose shares were delisted by the New York Stock Exchange and is the subject of a probe by the U.S. Securities and Exchange Commission into accounting irregularities. Its auditor quit and chief financial officer resigned in May after its finances were called into question by Citron and others.
A series of other Chinese companies listed in the U.S. and Canada have had their shares halted or delisted and face various probes.
Indeed, until recently the short sellers who had targeted Chinese stocks listed in North America, and particularly those who had gained listings through the backdoor by using a method called a reverse takeover (RTO) rather than through an initial public offering, had a remarkable run of successes.
Of the six companies Block has written on, only two - Oriental Paper Inc and Spreadtrum - are currently trading, with only Spreadtrum rising since his comments.
The short sellers dispute that their effectiveness has dimmed, and say they aren't having as big an impact because a lot of Chinese stocks have already been marked down because of the increased scrutiny.
"At this point the Chinese RTOs have been beaten down. They are over. There are a few left standing and people who own them know the inherent risks," said Left. "My goal is to explain the risks and fraud in the company. If a shareholder wants to own these stocks, so be it."
Dan David, vice president at the Skippack, Pennsylvania-based Geo Investment, which has also sold Chinese RTO stocks short, said Harbin's shares only rallied because of the takeover not because investors had decided the short sellers' views were wrong.
However, at Silvercorp, one catalyst for the share rebound was a rebuttal of the charges. For example, after short sellers questioned sales figures, the company said a report from KPMG Forensic confirmed its revenue, though it didn't address allegations about asset quality.
"We have demonstrated that there is no fraud at Silvercorp, that we have been unfairly targeted, and that we are the victim of a classic 'short and distort' scheme," said Silvercorp Chief Executive Rui Feng in a statement.
When they are wrong, the short sellers may not only be vulnerable to legal action - such as defamation lawsuits - but if they get a call wrong they are subject to unrestricted losses when a stock rises above the level at which they borrowed it.