A conversation with the mysterious Anonymous analysts who are exposing fraud and corruption in Chinese companies -- and taking them down.
- By Isaac Stone FishIsaac Stone Fish is FP's Asia editor. A Mandarin speaker, he lived in China for seven years before moving to Washington, D.C. His articles have also appeared in the New York Times, the Economist, the Washington Post, and the Los Angeles Times, and he has appeared as a commentator on MSNBC, the BBC, NPR, Al Jazeera, and PRI, among others.
Anonymous Analytics (AA), a mysterious group claiming to be a faction of the global hacktivist organization Anonymous, just released its second short-selling report, this time about the multi-billion dollar Chinese company Huabao International.
Entitled "Smoke and Mirrors," it’s a comprehensive unraveling of fraud in China’s biggest flavor and fragrance provider. It accuses Huabao of lying about its suppliers and grossly overstating its profit margins to enrich the chairwoman and her proxies, to the detriment of shareholders. Since short-seller Muddy Waters released its first report in 2010, many firms have investigated fraud in public Chinese companies, making millions by publishing information that caused companies’ stock price to fall. But this is the first time a group as murky as AA has entered the fray.
AA is cagey about most facets of its existence, including its motives. In its disclosure, the group says it holds "no direct or indirect position in any of the securities profiled in the report," but adds that readers should "assume" certain contributors to the report are shorting the stock. They certainly did their homework. At one point, AA claims Huabao used Photoshop to blur the location of one of its facilities, but AA found it anyway — by travelling to Botswana, where the group says it learned that the base "is used for a different sort of business altogether" but declined to elaborate. Its anonymity allows AA to dangle information; it warns it will release more incriminating details if Huabao threatens anyone involved in producing the report.
The company claims it will respond to these "misleading" allegations and has suspended trading in Hong Kong. The first short-selling report AA released in September contributed to the collapse of one of China’s biggest vegetable producers, Chaoda Modern Agriculture, then with a market cap of nearly half a billion dollars; trading of the company’s stock remains suspended.
I reached AA through the contact page on its website; the group agreed to an interview but wrote "we generally prefer email correspondence since we can answer with one voice instead of multiple on the cuff." Asked how many people I was speaking with, the response was: "at least one." AA answered all of my questions, with one notable exception: a request for elaboration on their funding and the identity of contributors to their report; to which they responded "as a matter of confidentiality, we don’t discuss anything related to our partners/contributors/affiliates/sources."
On the bottom of the first page of its Huabao report, AA appended the slogan "You should have expected us." Here’s what to expect next from AA:
Foreign Policy: What inspires your choice of targets? Would you describe there being any ideology behind it? Would you be more inclined to publish a report on say, a Chinese weapons company than a Chinese toy maker, for example?
Anonymous Analytics: Our choice of targets [has] been mostly limited by how much information we believe we can dig up on them. For example, our first report on Chaoda was a complete joke. The company was such an obvious fraud that we didn’t really have to put much effort into finding information on them. Everyone already knew it. We just came in and took the last punch. We believe the reason Chaoda no longer trades today has less to do with our report, and more to do with the fact that the company was giving regulators such a headache. If you’re going to commit fraud, don’t be so obvious.
With Huabao, our most recent target, things about the company just didn’t make sense. How did this 36-year-old female who no one had ever heard of manage to become a billionaire overnight, particularly in a notoriously government-controlled and patriarchal industry? This example is a stretch, but helps demonstrate the absurdity of Huabao: Imagine if you had never heard of [CEO Mark] Zuckerberg until after Facebook’s IPO. It just didn’t make sense.
Then there were the massive insider selling, opaque related-party transactions, etc. These are red flags that we start looking for, but more often than not, it leads down the rabbit hole.
Right now, we have enough tips and more leads and more people helping us that we can be more selective in our targeting process. That said, the industry doesn’t really matter as much as the people leading the company. Who would have thought a vegetable producer (Chaoda) would be an ideal vehicle to commit fraud? From a media standpoint, it would be more interesting to take down a weapons manufacturer run by some bald guy sporting a white cat. But that doesn’t always turn out to be the case.
FP: Any retribution from Chaoda Modern following your report?
AA: There has been no retribution to date. If there ever is an issue regarding safety, we do have an encrypted insurance file we will release.
FP: What is the relationship between Anonymous and Anonymous Analytics? You say that you’re a faction of Anonymous, but what does that mean exactly?
AA: Our members grew up within the Internet subculture and cesspool that is 4chan. We have been active in the Anon community over the last several years in some capacity. Some of us eventually grew up and got jobs in industry and government but we retained the dark humor that is Anonymous. More importantly, we retained the skill to source information and social-engineering capabilities that we honed through our work with Anonymous. This ability has proved useful in our more high-brow work with Anon Analytics.
FP: You say on your website that "All information presented in our reports is acquired through legal channels." So, no hacking?
AA: We don’t hack for information since that would attract all kinds of horrible attention we don’t need. Imagine the end result of a group of hackers raiding corporate servers for information, and then compiling that information into market-moving reports. It’s a good script for a movie, but it’s also good way to invite black helicopters. But then again, if we were hacking, chances are we wouldn’t go around talking about it.
FP: What would you say the Holy Grail of corporate exposure would be, in regard to China and the United States?
AA: This is a tough one to answer. In the U.S., the Holy Grail would likely be a major financial institution — there’s certainly enough venom among the U.S. population toward financial institutions. In China, it would likely be a government-controlled entity where management is asset-stripping at the expense of the common people.
FP: How many people were involved with this report? Any plans to publish a version in Chinese or in other languages?
AA: We don’t discuss the number of individuals that worked on our report, and it changes from project to project. Multiple languages might be something we look at down the line, but don’t expect to happen. There’s an issue of costs, time, and our sense of humor not translating well.
FP: I see your Drop Box is closed in part because of a large number of tips. Any hints on what we should expect from you in the coming months?
AA: Hopefully more quality work. We’re looking to step away from China. Targeting Chinese companies has become a cliché, which probably explains our self-loathing. At the same time, there are some reasons that these companies have become a target:
First, China’s governance and accountability standards have not yet reached the same level as developed markets. In other words, managers of these companies have not yet learned how to properly hide their improprieties.
Second, most Chinese companies are manufacturing- or production-based. This lends itself well to the diligence process. It’s easy to go into a factory and take a picture of a production line that’s idle. It’s a binary decision: Either the company is producing, or it isn’t.
When it comes to more established economies, they tend to be service-based. You can’t exactly go into the office of Goldman Sachs and take a picture of a stack of papers and some guy playing solitaire at his computer. Contextually, it doesn’t translate well into a report.
These are just some of the reasons Chinese companies have become easy targets. That said, we are trying very hard to make our next report … unique.