Is China MediaExpress A Fraud? Part 2 (CCME)

I want to preface this section by saying that investors can come to whatever conclusions they want from what Mr. Block had to say. I am just recounting our conversation. I am sure Mr. Block would like to see CCME shares fall. Do your own due diligence. I have no way to verify everything that he told me. I spoke at length with Bill Block on Friday. Mr. Block is the father of Carson Block, who is the Muddy Waters analyst whose report cratered CCME on Thursday. Mr. Block's LinkedIn profile lists him as President at a firm called W.A.B. Capital. Unfortunately, we did not speak much about his background. But, Mr. Block seemed to be very knowledgeable about CCME, RINO and the situation in China. Mr. Block told me that Carson Block is a licensed attorney in the State of New York. He said that he has done consulting work for Top 5 AUM mutual funds. He said that Muddy Waters stands by the report, documented every detail in the report, and possesses further damning evidence that was not included. Furthermore, Carson is fluent in Chinese and is acting as an "aggregator." According to his father, Muddy Waters has a "hell of a network" and is in contact with accounting, manufacturing, marketing, and financial professionals on the ground in China and that "no Caucasian" could get the info he has without substantial Chinese assistance. He further stated that Muddy Waters is wired into a group of hedge funds that short Chinese reverse merger scams like RINO. Per our conversation, it is my belief that Muddy Waters will issue a rebuttal within days of any response from China MediaExpress Holdings. Bill Block believes that China MediaExpress is defrauding investors and the shares are worth maybe $5. He also confirmed that Muddy Waters does trade in the shares of the company's they cover (something we already knew). Two very important points were discussed in the course of our conversation that I think will be of some interest to investors. First was the auditor of CCME, which is Deloitte Touche Tohmatsu. According to Mr. Block, it is a completely different ballgame in China, and the "Deloitte audit wouldn't make any difference." I have no idea if that is true, but it would not be the first time that a top auditing firm got egg on its face. Do you remember a little outfit called Arthur Andersen that was the auditor for an obscure company called Enron? The second point of discussion was about Starr International. One of the points that the supporters of CCME are pounding the table on is the due diligence supposedly done by Starr, which has invested $43.5 million in the company. Starr International is a privately-held global financial services company comprised of insurance entities and investment subsidiaries that is controlled by Hank Greenberg (the former Chairman and CEO of none other than AIG). You see, the bulls are pointing to this Starr stake as proof that CCME is legit. This stock, despite its unbelievable operating metrics and growth rate, has pretty much no institutional following. If you check out the

, you will see that exactly 9% of CCME shares are held by Institutional & Mutual Fund Owners. But I thought this was such a great company? The institutional holders are all passive investors, most of which hold the shares as part of index funds, etc. Of this, I am almost 100% sure. It is doubtful that any of those firms you see in the major holders section did due diligence. But there is Starr. It looks as if Starr got a very sweet deal from CCME. Here is the press release titled

Here are the terms of the deal, per the press release: "Under the terms of the agreement, Starr International will purchase, in a $30 million private placement, 1,000,000 newly issued shares of CME Series A Convertible Preferred Stock at $30.00 per share, together with 1,545,455 of CME common stock purchase warrants." Furthermore: "Each of the 1,000,000 shares of Series A Convertible Preferred Stock will be convertible at any time into three shares of CME common stock. The newly issued warrants will be exercisable at any time into one share of CME common stock at $6.47 for each warrant held." So according to my math, Starr received 3,000,000 CCME common shares at a price of $10 apiece and 1,545,455 warrants convertible into one common share each at $6.47. Here is the problem: CCME shares were trading at $11.50 when this deal was done. They supposedly had a tremendous business. Why would they give Starr such favorable terms? Furthermore, as Mr. Block kept saying, why didn't this company just do an IPO in the first place? Why in the world do they have this baffling ownership structure and take the reverse merger route onto the NASDAQ in the first place? Remember, if you look at CCME's growth profile and operating metrics this is one of the best businesses in the world.

The investor relations contact for China MediaExpress is a woman named Lena Cati who works for a company called The Equity Group. I attempted to call Ms. Cati on Thursday after the stock had fallen 33% that day and 50% in the previous 5 trading sessions. I was told that she was "unavailable." Apparently Bloomberg and Reuters were also not able to get through to her despite the fact that the company she represents had just lost 33% of its market cap in a couple of hours. Strange, no? Well I called back on Friday. The secretary seemed interested in putting me into contact with her, but said that she was on the phone. She took my contact information. After an hour or so I called back. This time she said that Ms. Cati was still on the phone and very busy and that I should email her. According to her, they were trying to respond to all emails. I said “ok,” and then asked about Ms. Cati's whereabouts on Thursday. I was told that she was in "meetings" all day. Plausible, but if she believed in the veracity of CCME's financial statements, I would think she would be trying to calm nervous investors. Needless to say, I did not get an email response. So I called back. I was again brushed aside and told to email. All the while, shares of CCME kept rising, due to what I believe was heavy short covering. On Friday, the stock closed 25.25% higher at $13.89. That got me thinking...if she really is on the phone, whom is she talking to? Is she talking to other investors telling them everything is fine? Are they, in turn, pushing the shares up? Clearly that would not be ethical, and likely illegal. Don't we all have the right to the same information? To be clear, I do not have any idea if that is what was going on. The gist of the second email I sent was this: "I am going to write a story on CCME. I believe that a crime has taken place, although I am not sure of the perpetrator (could be CCME management, could be the shorts). I am looking for someone who is willing to defend the company. Do you want to defend the company's reputation? I am trying to get CCME's story out. Give me 5 minutes." No luck.

Hardly anyone at this point. A firm called Global Hunter Securities did publish a

on February 1, 2010 reaffirming their Buy rating and $26.00 price target on CCME shares. This report came out post-Citron, but before the Muddy Waters report. I urge investors to read it. If this company is not a fraud, Global Hunters' price target is conservative, in my opinion. The analysts are supposedly in China doing due diligence. The report details their findings, and it sounds convincing. They claim that they have done "extensive due diligence" during the last seven months. "We interviewed a number of advertising customers, bus operators, and the company's regional managers. We also talked to CTR, the third-party market research firm, visited Starr International's office in Shanghai and talked to the company's independent auditor, Deloitte." Global Hunter is “comfortable” with CCME. Here is a description of the firm from Bloomberg - "Global Hunter Securities, LLC is a boutique investment banking firm that provides financial advisory services...Global Hunter Securities, LLC was formerly known as Velocity Trading, LLC and changed its name to Global Hunter Securities, LLC in October 2005. The firm is headquartered in New Orleans, Louisiana with additional offices in California and Texas." The analysts who published the report are Ping Luo and Jody Dai. I emailed them both. Only Ms. Dai responded. Her response piqued my interest. She wrote, "I would be happy to give you my best knowledge of the company, although I would strongly suggest you to contact Ping Luo, who is the senior analyst on the name and conducted the majority of the due diligence." Ms. Luo did not respond. That might mean absolutely nothing, I don't know. I do plan on taking up Ms. Dai on her offer to tell me about CCME, but due to the time difference in the States and China, it will have to be after this article is published. There are a couple of posters on Seeking Alpha that have come out in support of CCME. They are not institutional level investors, but I do think that readers should peruse their defenses of the company to see if they find them compelling. I don't, but I may be wrong. One is by a poster named Michael Anderson and his piece can be found

. The other is by Robert Weinstein and can be found

. For all I know, these supporters could be correct in their assessment of CCME and, if so, they will likely make a nice chunk of change.

Predictably, and justifiably it seems to me, the wires have been active with press releases from law firms lining up to sue China MediaExpress. All of the press releases that have come out thus far are targeting CCME, and none are going after Citron or Muddy Waters - although that could change. Find those below.

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I believe that a crime has taken place. I am not sure, however, who the perpetrators are. Either Citron, Muddy Waters and a cabal of short sellers have conspired to take down the share price of CCME for monetary gain, or CCME management has defrauded investors. I believe that the likely outcome is that China MediaExpress will be delisted and forced to restate their financials - but I could be 100% wrong. This is either a $5 stock or a $26+ stock. It is my belief that the onus is now on CCME to exonerate themselves with regard to the fraud accusations that have been brought forward. If they successfully do that, I would be more than happy to take a position in the company at any price below $18.00. Disclosure: I have a small bearish position in CCME options Have More Information? Questions? Email me at scott.rubin88@gmail.com