ANALYSIS-Some Chinese firms in US turn tables on short sellers=2

"MANIPULATION SCHEME"

In the past, companies have launched their own legal action in U.S. courts against short sellers and analysts they claim conspired to issue misleading research reports that drove down their stock prices.

Financial firms and short sellers have fought such lawsuits by arguing that companies are trying to blame them for their poor stock performance. They also argue that the lawsuits are an attempt to chill legitimate analyst research that may be critical of a business.

U.S. online retailer Overstock.com has been in long-running litigation over what it has called a "massive, illegal stock market manipulation scheme" by Goldman Sachs and Merrill Lynch, now part of Bank of America , to drive down its stock. It is preparing for trial in a California state court in San Francisco next March against the firms, which deny wrongdoing.

The SEC can take action if it can be proven that a short seller fraudulently manipulated the market, whether by hyping or distorting it with intent.

One sign that the short sellers are in partial retreat is that some have pulled back from the market.

John Bird, a Manor, Texas-based investor who has take short positions in several Chinese stocks, including Harbin and Silvercorp, said recent events prompted him to scale back his positions in the sector to $7.5 million from $10 million.

He expects to lose about $500,000 on his Harbin bet, though he's not convinced he was wrong.

"It's a reflection of the frailty, the ignorance and the complexity of the game," Bird said. "You kind of have to sit there and put up with the 'all life is suffering' approach."

And Sydney, Australia-based hedge fund manager and short seller John Hempton said in a recent blog (brontecapital.com) that his put options on Silvercorp would likely expire worthless. Mind you, while he said his interpretation of the company's problems may have been wrong he still was puzzled by how the company was spending a lot less on it mines than companies elsewhere in the world.

Still, the short sellers haven't lost all influence. Left's assault on Harbin appears to have failed, but he continues to attack other companies with accounting or governance problems.

On Nov. 1 he issued a negative report on Qihoo 360 Technology Co , saying the Internet company's management had a "disturbing record of deceit." After the report, the stock slumped 10 percent on its heaviest volume since April.

"I would do the same thing on Harbin again," Left said. "What am I supposed to do, give up and go home and live with my mom? I move on."

(Reporting by Ryan Vlastelica, Allison Martel in Toronto, Clare Baldwin and Daniel Bases in New York; additional reporting by Emily Flitter, Sarah Lynch, Martha Graybow, Editing by David Gaffen, Martin Howell)