We believe that LLEN is an excellent opportunity to short a fraudulent Chinese reverse merger that should ultimately be worth very near zero. Several of the Company's assets, including a coking coal factory and the Hong Xing coal washing factory, are actually still owned in a sole proprietorship structure by Dickson Lee, the CEO of LLEN, or by unrelated third parties. Additionally, two of their major subsidiaries, which the Company claims are wholly owned, have significant ownership by unrelated subsidaries. Shareholders are led to believe that the public entity has ownership of these assets, but a little digging reveals that many of the most important assets the Company owns are actually owned by third parties, or by company executives.
LLEN also has many of the tell-tale signs that have characterized other Chinese frauds. They have burned through auditors and CFO's at a prodigious pace, and most of the auditors they used were very small and hardly reputable in the first place. Their SAIC filings (in China), suggest that their financial statements filed with the SEC grossly overstate revenue and profitability. In fact, the numbers that are reported to the SEC can scarely be believed, with profitability and margins that suggest LLEN runs one of the premier coal operations in the entire world. This is particularly difficult to believe given the capital intensive, and therefore, scale sensitive, nature of coal mining, as well as the management team's complete lack of experience in coal mining.
LLEN's management team bears mentioning as well. Dickson Lee, the founder and CEO, has been charged with a variety of securities violations in connection with LLEN since 2003, and was even fined $65,000 by FINRA and barred from the securities industry for a year. These charges were primarily related to material misrepresentations Lee made in relation to LLEN private placements. While these historical allegations do not necessarily mean that LLEN is necessarily fraudulent, it is difficult to place much faith in the remarks of a management team with such a checkered history.
It is worth noting that like many other Chinese RTO's, short locate availability is limited. However, LLEN is optionable, and for a company of its size, has a reasonably liquid options market. We have initiated our position through a combination of options and stock.