One of the biggest scandals in recent Canadian corporate history may be a mere prelude to a massive economic collapse, if a documentary making its world premiere at the Toronto International Film Festival is to be believed.
The China Hustle rings an alarm over Chinese-based companies that have secured listings on North American exchanges through reverse mergers (a.k.a. reverse takeovers), suggesting some may be engaging in accounting deceptions similar to the one that ultimately led to the multibillion-dollar collapse of Sino-Forest Corp.
The film features a small crew of notorious China skeptics, including Carson Block, the chief investment officer of Muddy Waters Capital, whose 2011 report on Sino-Forest alleging the Hong Kong-based firm was wildly overstating its assets helped bring down what at the time was the most valuable forestry-products company listed on a Canadian exchange.
The film also notes the suspicion with which Chinese authorities treat those who might try to get at the truth of a company's claims. It includes the story of Kun Huang, a Chinese-Canadian citizen imprisoned for two years in China after the hedge fund for which he was working as a researcher issued a report questioning the value of ore deposits at a Chinese mine owned by Silvercorp Metals Inc., which is listed on the TSE.
But The China Hustle, which will have its final public screening at TIFF on the evening of Friday, Sept. 15, also argues that misrepresentations make up an endemic problem that casts a severe shadow over the Chinese companies listed on North American exchanges, many of which secured listings without submitting to the sort of scrutiny that Western companies engaging in initial public offerings must undergo.
And it places the blame on North American regulators and companies, such as investment banks handling stock offerings, for looking the other way in order to serve Western investors eager to buy into the fast-growing Chinese economy.
A postscript notes that there are more than 100 Chinese companies currently listed on U.S. exchanges, with a value exceeding $1.1-trillion (U.S.).
The film centres on Dan David, a Pennsylvania money manager who, in the late 2000s, says he earned impressive returns on such Chinese stocks as Puda Coal and China Integrated Energy before realizing the companies were problematic. (A website published by Mr. David, stopthechinahustle.org, notes that Puda Coal raised more than $128-million in capital, and is now worth almost nothing.)
He turned to short-selling, and began lobbying U.S. politicians and regulators to clamp down on the problem. (The film has a scene of Mr. David trying unsuccessfully to press his case at a July, 2016, U.S. Senate Finance Committee hearing, where politicians such as Elizabeth Warren appear more interested in trade imbalances.)
The film's executive producers include the billionaire investor Mark Cuban and Alex Gibney, a well-known documentary filmmaker who, at a screening over the weekend, drew a parallel between the China Hustle scandals and the scheme at the heart of his 2005 Oscar-nominated Enron: The Smartest Guys in the Room.
At a question-and-answer session, Mr. Gibney noted that most people trying to make sense of Enron's finances were blithely credulous until Bethany McLean, a Fortune magazine reporter, "asked the simple question, she just said over and over again: 'How does Enron make its money?' And it was a simple question, but she never got a satisfying answer. And it was on the basis of that simple question that everything began to crumble."
Mr. David, who also appeared at the Q&A, warned audience members that "the time is coming when the bottom is going to fall out for China. And everybody here is going to feel it, because every pension is in it."
In an interview with The Globe, the film's director, Jed Rothstein, noted that money managers from the West are increasingly looking to invest in mainland Chinese companies: Over the summer, the MSCI announced it would put more than 200 Chinese companies in its world indexes next year. "The short of it is we're becoming more integrated," he said. "So, to find out the regulatory system, and the rules governing this increasingly global market system, are stuck in the 20th century, when money now moves in a 21st-century pace, was very troubling."
The film includes archival footage of raucous investment conferences hosted by Roth Capital Partners, a boutique California bank that handled a number of reverse takeovers for Chinese firms, where investors are entertained by Snoop Dogg and Billy Idol and the bank's stage-diving chairman, Byron Roth.
And it includes an uncomfortable interview with Wesley Clark, the U.S. military man turned Democratic-presidential candidate who, after quitting politics, became the chairman of Rodman & Renshaw, a New York-based bank that also handled a number of reverse takeovers.
When Mr. Rothstein, from behind the camera, begins to press Mr. Clark on whether he bears some responsibility for the losses of U.S. investors, Mr. Clark abruptly walks out of the interview.
"It's a very critical component of this problem, in the terms of these Chinese reverse mergers, in terms of other financial scandals and in terms of this general issue of dishonesty in society," Mr. Rothstein said.
"Things are covered up by institutions that we trust, renting their good names to cover up fraud and dishonesty, and I think that we need to be more skeptical of some of these endorsements."