The share price of Chinese meat processor China Yurun Food Group has come under pressure in the last few days with rumors that Muddy Waters is going to release a negative research report on it.
A quick check at the Muddy Waters website shows that their latest target is Spreadtrum, Communications Inc (SPRD).
Singapore state investor Temasek Holdings and China-focused private equity firm Hopu had invested in Yurun last year. Fund houses J.P. Morgan Asset Management and Fidelity were also shareholders.
While the rumors have not been confirmed yet, the recent spate of negative publicity involved China based companies does bring out an interesting point.
If big institutional investors with their research teams are not able to detect an ongoing fraud, what chance does an individual retail investor has?
In an earlier case involving Sino-Forest, renowned hedge fund manager John Paulson also got burnt.
In a note to his private investors, John Paulson mentioned that as a passive investor in public companies, he had access to the same information that everyone else does.
While his firm does conduct considerable due diligence including site visits, they must still rely on audits and underwriter due diligence that financial statements and disclosures are accurate.
For Sino-Forest, John Paulson also knew that Temasek Holdings had acquired a 16% stake back in March 2007 after months of due diligence. This was something that gave him comfort then, but as it turns out, doesn’t count for anything.