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Toronto Documentary ‘China Hustle’ Probes Financial Misdeeds, Swipes at Alibaba

The China Hustle,” a feature documentary that premiered at the Toronto Intl. Film Festival on Friday, suggests that e-commerce and entertainment giant Alibaba is ripe for investigation alongside smaller Chinese companies accused of deceiving investors and regulators.

The film appears to tar Alibaba with the same brush as a number of smaller Chinese firms that the film says deliberately inflated their earnings, lied to investors about their business scale, and listed their shares on U.S. stock exchanges through a dubious method known as a reverse merger or reverse takeover. Their actions endanger pensions, investment funds and the financial system, the film says.

The China Hustle” is directed by issues-driven multihyphenate Jed Rothstein, whose short “Killing in the Name” was Oscar-nominated in 2011. The film’s production houses include the pedigreed Kennedy/Marshall Company, and Todd Wagner and Mark Cuban’s 2929 Prods.; executive producers include Cuban, Wagner, Frank Marshall and campaigning documentary veteran Alex Gibney, whose films have taken on Enron, Lance Armstrong and Scientology, among others.

Most of “Hustle” consists of interviews with investors whose discovery of another gaping hole at the heart of the global financial system turned them into short sellers — investors who believe an asset’s price will fall. It discusses several small Chinese companies, which are not prevented by Chinese law from feeding misleading financial information to investors so long as the suckers are overseas. And it shows how gatekeepers such as auditors, lawyers and dealers, in China and the U.S., were financially motivated to ignore the companies’ deceptions.

At the end of the film, without preamble, “Hustle” turns its sights on Alibaba. In the closing minutes, as a voiceover warns that U.S. investors and regulators must do more to protect themselves from fraud by Chinese companies, Rothstein shows 2014 footage of Alibaba executives ringing the bell on the first day that the company’s shares were traded on the New York Stock Exchange. That is followed by 2017 footage of Alibaba founder Jack Ma glad-handing then-President-elect Donald Trump.

“I’m not saying Alibaba is a fraud. I think the reason [the Alibaba segment] was included was more of a Muddy Waters-type warning for where we need more research,” Gibney told Variety, referring to one of the short-selling investment firms featured extensively in “Hustle.” Headed by Carson Block, Muddy Waters conducts proprietary research into a listed company, sells stock on the anticipation that its price will drop, and then publicly releases its findings in order to trigger the share-price fall.

In exchanges with the audience after “Hustle’s” world-premiere screening in Toronto, financier Dan David said he had had enough of Chinese companies that were “lying, cheating and stealing.” Then he asked: “Is Jack Ma from Alibaba prosecutable? No. He lives in China, he is a Chinese citizen, and if he steals the entire stake in Alibaba he cannot be prosecuted in China.”

“The time is coming when the bottom is going to fall out of the China market and everybody here is going to feel it, because every pension is [invested] in [Chinese stock],” said David.

It is not currently known if David, Block or any of the filmmakers have long or short positions in Alibaba stock.

Alibaba did not use the contentious reverse takeover method to list its shares. Instead, it conducted the largest initial public offering (IPO) in U.S. history to raise some $25 billion of fresh capital in September 2014. Its ADR shares have risen from $68 at listing to $169 on Sept. 8. At that price it has a market capitalization of $392 billion, making Alibaba currently the seventh-largest company in the world.

“Enron was also a large company when we made ‘The Smartest Guys in the Room,’” Gibney said of his 2005 documentary.

Alibaba has not been accused of fraud. But its IPO, management structure and company finances have been criticized by activist investors. Alibaba is operated by a Ma-headed management committee that has operational control but that is not answerable to shareholders. That controversial structure was rejected in Hong Kong, where the company initially sought to list. Hong Kong regulators argued that all equity holders should have equal rights. The split voting structure, however, was acceptable to U.S. stock regulators at the Securities and Exchange Commission.

Since then Alibaba has differed with financial analysts over definition of its gross merchandise volume (roughly the sum of all business transacted on its platforms), on share-based pay for executives, and the application of U.S. generally agreed accounting principles (GAAP). As a result of such criticism, Alibaba now reports GAAP and non-GAAP earnings and plays down gross merchandise volume.

 

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