Market Watch - Barbara Chai - 04 April 2018
In the new documentary, “The China Hustle,” there’s a moment when Dan David, a whistleblower and activist short-seller, returns home to his extended family and explains his work. He is trying to stop dubious Chinese firms from profiting on the U.S. stock market through backdoor, reverse takeovers. 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.
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“Nobody took me seriously until I made money,” David said in an interview at a special event for the film, hosted by Peggy Siegal last week 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.
MarketWatch spoke to Gibney and David about “The China Hustle” in separate conversations at the event.
This film mostly depicts events in the early 2000s, but it draws a direct line to Chinese companies today like Alibaba.
Gibney: The world is so fully integrated economically, but when you’re talking about the U.S. economy being so fully integrated with the Chinese economy, and you have certain fundamental problems with the Chinese economy like the rule of law, suddenly it raises all these huge issues. Yes, a lot of money is flowing around, but can you count on the kind of stability that you hope for if you’re a pensioner or a nurse, or a doctor just hoping to keep their retirement savings in tact?
What would you like to see happen now, after the film is released?
David: A better relationship with China, where we respect each other. Where if we steal from them, our people go to jail -- and they do -- and if they steal from us, their people go to jail. That’s a friendship. Right now, we have a relationship based on mutually assured financial destruction.
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 did. Very brave. Many others turned down that opportunity. It was very hard to watch and I don’t watch the movie. I’ve seen it 1 1/2 times.
Gibney: Suddenly, you realize this is not just speculators who are moving money around. These are real people. Average, everyday people who have some of their retirement money in these opportunities, suddenly at huge risk.
Dan, you’re an activist and you’re shorting these stocks. But in doing so, you still profit. In one of the interviews, you say that there are no good guys in this film, including yourself.
David: Well, the question off-camera was, “How do you feel about being the good guy in this film?” I said, “There are no good guys in this film, including me.” I was just doing my job. That doesn’t make me a good guy. That was the way I was raised. I was lobbying Congress and I failed. That doesn’t make me a good guy. I made money and people lost money. That doesn’t make me a good guy. I never held myself out there as a good guy. I try to tell the truth, I try to do a good job. I try to take care of my family and my fellow countrymen. I usually succeed. When I fall short, I try to learn from it.
In this age of “fake news,” do you think documentaries play a more important role?
Gibney: I think that the best ones lay out a framework and a set of rules in advance, and they live by them. The really good ones give you a sense of what is really true. So, I think they rudder against this rather cynical idea, which is really motivated by raw power, which is that there is no such thing as truth. I think there is such a thing as truth, and you may not always be able to get right to the heart of it, but you can get pretty close to it. So, ultimately it’s about establishing that relationship of trust with the audience. In the course of the documentary, I think you can do that. Documentaries now are playing a huge role. One, because they’re telling stories, which are emotionally compelling, and it’s a lot easier to understand something when it’s presented in a story, than when it’s presented in a pie chart or a PowerPoint presentation. I also think there’s a sense of rigor about a lot of documentaries now, a fearlessness to pierce the bullshit. That’s what we’re victims of today mostly, the 24-7 news cycle where everything is so ephemeral. It’s just a tweet here and a tweet there. Nobody digs deep, and nobody looks at the structural problems behind the momentary news.
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.
Gibney: Let’s talk about that — that’s usually mostly just bullshit. When you look at the market and you think, okay, what does civics tell us about the market? Look deeply at the management, and look at the fundamentals and all of that. Most smart traders don’t pay attention to any of that shit. They’re moving in and out at the speed of electronic impulse. They’re looking for arbitrage opportunities. They’re not looking at the integrity of a company. So, this is where you begin to examine the foundations that the whole system is built on.
David: Regular journalism is cycle-driven and that becomes a problem. Once you have a cycle of news based upon say, China fraud, the next cycle that would be based upon that kind of fraud has to be bigger and more salacious. It’s way too short. That’s why great reporting by Dune Lawrence and by Bill Alpert has been under-appreciated. But because they’re in a cycle, they have to move on. I don’t have to move on.
Going back to the complicated nature of these investment bankers, the film also scrutinizes the scaffolding around them, including politicians, lawyers and chairmen.
Gibney: In this film in particular, the lawyers and the accountants — this was certainly the case with Enron, too — play a role of trying to pretend a certain respectability that doesn’t really exist. That’s part of the con. But they don’t look at their role that way. They look at their role as people who are getting a fee. They don’t look at their role as being the arbiters of some kind of moral universe. They’re just hired to do something and so long as they don’t break the law, they’re fine with that.
For a film like this or “Enron,” do you have to lawyer up more than usual?
Gibney: You do have to lawyer up. I think we’re getting to a point, particularly in my shop, where you have to be very careful and you spend the extra time it takes to make sure that you get the facts right. It doesn’t mean you always get them right, but you do your best to do your due diligence. That was the case with Scientology, when we did “Going Clear.” It was the case with “Zero Days.” If you’re going to stick your neck out, you better be sure that you know what you’re doing.
Did the frenzy around the premiere of “Going Clear” change you as a filmmaker in how you approach these projects?
Gibney: Well, what it did is it honestly made me encouraged about the form. Fifteen, 20 years ago, when I was going out and looking for a job, people who were nervous about my wife’s future would say, “Whatever you do, don’t mention the word ‘documentary.’” But that’s all changed now. I think there’s a sense of power and force that this form has, that’s really very potent. And by the way, it’s usually popular. “Going Clear” was seen by a lot of people, including a lot more people than those who saw many of the dramas on HBO. It’s an important moment. People’s hunger for the truth is immense. Documentaries, by and large, deliver on authored versions of the truth that are an attempt to get an essential truth.
“The China Hustle” is released by Magnolia Pictures in theaters and available to stream here.