Exclusive Interview with JadeorStone.com (TSTC, GURE)

When John Paulson lost $700 million dollars in Sino-Forest

and CNBC called Muddy Waters Research onto daytime television to talk about the company, the environment for U.S.-traded Chinese companies changed forever. While some investors have heard of (and pray their stocks are never subject to the investigations of) research firms like Muddy Waters Research, fewer have heard of the dozens of smaller research shops that have sprouted up within the past few months. In the wake of Muddy Waters' success, many new Chinese-focused research firms are deciding to publish their due diligence on the web for the benefit (or detriment?) of investors everywhere:

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. Indeed, with the Securities and Exchange Commission's recent crackdown on Chinese companies that have fraudulently entered the U.S. stock exchange, many suppliers of investment research, financial management companies, and business media sources are realizing the power of due diligence. After all, Sino-Forest (lest the reader forget) dropped over 90% after Muddy Waters Research released its negative report on the company. Needless to say, due diligence is changing the game for Chinese stocks. Over the last few years, hundreds of Chinese "exports" have sometimes bamboozled their way onto U.S. stock exchanges through barely-noticed but lubricious mergers with inactive companies. Many of these Chinese "reverse merger" stocks experienced a high rate of share price growth despite low revenues and suspicious accounting practices. According to CNBC and other sources, these "reverse takeovers" could have potentially stolen billions from American investors. Benzinga was fortunate enough to interview one of the newer research firms that focuses on Chinese companies trading in the U.S.: Jadestone. This corporate investigator has had a 10-year presence in China. According to its website, its "professional local and foreign team can assure clients a research that will expose the target and will reveal its genuine value." Benzinga was particularly interested in the research firm, which has released negative reports on two companies so far, because of its low-profile website and minimal amount of information about its operations. Drawn by reports on two companies on

, Benzinga decided to dig a bit deeper for some more color on the two companies, Jadestone itself, and the Chinese market that has been subject to particularly intense scrutiny during the past few months. "A lot of good companies were hit as well," said one of the two employees interviewed, both of whom wished to remain anonymous. When asked for their names, they explained, "It would make sense for Chinese companies to hunt down the ones that hunt them down." Enough said. But Jadestone is not just a trash-em' bash-em' shop. Despite the negative stance of its first two reports, Jadestone actually expects to publish positive reports. "We approach our research open-minded," the anonymous employee explained. "We come to investigate. We don't assume it is fraud." Though these two sources remain anonymous and declined to comment on the size of their firm, they affirmed that they "absolutely" conduct their investigations in-person. While other companies release investigative reports without on-the-ground due diligence, this is not the Jadestone way. "We want to bring real, hard evidence from the actual sites. We visit the actual sites of the companies. For example, we visited Telestone three times." Jadestone's two negative reports on Telestone Technologies Corporation

and Gulf Resources

prompted responses from both companies. Telestone, in fact, is holding a conference to discuss allegations against the company within a couple days. When asked if Jadestone was researching other companies or was in contact with Carson Block of Muddy Waters Research or Andrew Left of Citron Research, one of Jadestone's employees said, "We have a few companies in our pipeline. We're not in a personal relationship with Muddy Waters or Citron [Research], but we have our channels to get in touch with them if we need to. Right now, though, we are very independent." For Benzinga, despite the clarity and thoroughness of Jadestone's reports, there was still a nagging question: Why release reports on small-cap companies and not larger ones? Both Telestone and Gulf Resources have market capitalizations below $100 million and are much smaller than the major fraud stories that make major headlines, like Enron, Long-Term Capital, or Bernie Madoff. Jadestone offered this response: "It might be true that small-cap companies might be more touchy and it might be easier to do a con or fraud on those companies. On the other hand, the fraud would be smaller, because the company would be smaller. Right now, we are researching small-cap companies and some larger companies." Jadestone told Benzinga that it would be offering additional disclosures in the future regarding its relationship (if any) with any short positions in stocks, which was a interview question on which Jadestone declined to comment. Benzinga will continue to reach out to Jadestone, as well as other research firms focusing on exposing the problems of public companies in the U.S.