Kandi Technologies Group Gets Added to the Russell Index, SEC Investigation and Poor Accounting Be Damned

Last week, Kandi Technologies (NASDAQ: KNDI  ) was added to the Russell Global Index. The inclusion was great news for investors in this young electric-vehicle company, as it helped to legitimize its business and could create additional demand for shares. 

But the question investors should be asking themselves is, "How could Kandi get added when it is involved in an ongoing SEC investigation, and its most recent annual report shows four accounting red flags?"

How indexes really work
There are hundreds of indexes in the stock market, and each has its own requirements for a company to be included. Looking at the Russell Global Index, it states that the index includes "[e]very publicly traded company around the world that could merit investment by a global institutional asset manager by meeting minimum size and investability standards...".  This basically means a company needs to meet a minimum market cap and have enough volume to be sold and bought in large quantities, meaning that is has very liquid security. Investors may have noticed that the index doesn't look at any information related to the underlying business. It's solely based on quantitative trading metrics -- and this is where investors can be led astray. 

The damning evidence facing Kandi Technologies
Now that investors know how companies get added to the Russell Index, it's time to look at Kandi's accounting issues and SEC investigation. In the video below, Motley Fool analyst Blake Bos explains the worrisome signs at Kandi Technologies, and also shows investors his 15-minute process for quickly weeding out questionable investments. Watch the video below and follow along with Blake as he shows investors how to quickly avoid making costly mistakes.

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Comments from our Foolish Readers

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  • Report this Comment On July 07, 2014, at 1:19 PM, corstrat wrote:

    Obviously one of the bigger mistakes you made was not buying KNDI, But "sour grapes" aside, you also obviously don't have a clue about speculative investing and certainly know nothing about KNDI.

    For starters; are you aware that there is NO SEC requirement for any company, listed or otherwise to report that they are a party to an SEC fact finding investigation? That's right, KNDI had no obligation to report in their 10K or any other document that they were queried by the SEC for more data in such an investigation back in Nov. However, due to the high level of integrity the Company has exuded over the almost eight years as a public company, they took it upon themselves to put a couple of lines in their 2013 10K that they were being asked questions by the SEC. However, they did make it clear and I quote from their 10K page 34: "..The Company does not anticipate a negative result.."

    Obviously the Company knew what they were talking about because on June 6th, seven months after the start of the investigation, the SEC gave KNDI an "Effective" notice on an S-3 registration they had filed. And since you either don't know the significance of such a notice (or due to bitterness that you didn't buy KNDI when it was much cheaper), what this means is that the SEC has approved KNDI to issue more shares. Something that even you must admit carries a lot of weight as to whether the SEC feels KNDI has done anything wrong. Certainly much more weight than being listed on the Russell Global. BTW, you will also note that there is no mention of any investigation in the subsequent KNDI 10Q.for Q1.

    But do you know why their is no requirement for a Company to report such an Investigation? It is because at any given time, most all significant Companies are part of some ongoing SEC investigation. Larger Companies usually have multiple investigations underway. The last thing the SEC wants is to be bombarded by shareholders, both pro and con re any investigation, much less a simple "Fact Finding" investigation that KNDI was a part of.

    Additionally, I have no idea where you came up with your comment that KNDI had sold 7 million shares in 2009-10. KNDI did not sell any shares until December of 2010, some 14 months after the period that was put in question about an insignificant 350,000 that was supposidly "given" to some promoters.(they did, however sell some $10 mill in 3 year private debt to two funds in early 2010, which a short term promotion would have zero influence on) As it turns out, it now appears this stock "give-a-way" which, btw, is not illegal even if true, may never have happened in the first place. According to the CEO of the Company, this never happened. And since the company was cleared to sell new shares in June, likely now understood by the SEC as well.

    KNDI has been the subject of almost 50 attack articles over the years, likely due to its pervasive large and growing short position. But to date, not even these agenda driven writers have dared to even accuse the company of breaking any laws, let alone doing anything fraudulent. Have they perhaps "miscued" on a few items over the years in their regulatory procedures, of course, so has almost every public company to include US companies, but since nothing they have done has caused them to miss-state any numbers, perhaps a little leeway should be given to a foreign company new to US ways of doing business in a strange language,

    Sorry if the truth makes you look like a fool, and I don't mean of the more respected "Motely" type, but maybe in the future you will do better DD before you pontificate ignorant wisdom on innocent shareholders.. 

  • Report this Comment On July 07, 2014, at 1:36 PM, spfmf14 wrote:

    You can try your best on behalf of the shorts, Blake, but your "red flags" are not convincing, except for scaring maybe the most naive. "Damning evidence" - get real, man! KNDI is headed by a man of the higher character, and this company is still in the very early stages, on it's way to very big future! Put your money in CDs, Blake.

  • Report this Comment On July 07, 2014, at 2:05 PM, Fleischio wrote:

    Blake - You don't have anything compelling, go take a few more selfies and get back to DDD and SODA.

  • Report this Comment On July 07, 2014, at 2:36 PM, captainccs wrote:

    corstrat said it all except for the curious coincidence that Kandi hit pieces always come out right after good news hits the presses. If I were Conan Doyle I might call it "The Curious Case of The Dog that Only Barks at Good News." A modern writer might title it "Short Protection."

    Today Kandi announced that the Kandi-Geely JV received a $31.8 million dollar subsidy "for sales of over 3,000 Electric Vehicles ("EVs") between June and December in 2013 and sales of over 1,000 EVs during the first quarter of 2014." Since half belongs to Geely and since there are 40.7 million shares outstanding, that's 39 cents per share that goes right down to the bottom line.

    To understand the full significance of the subsidy, look at the 1st quarter results:

    "Non-GAAP net income*, excluding the effects of the stock award expense and the change of the fair value of financial derivatives, was $1.6 million, an increase of 30.4% compared with $1.3 million in the first quarter of 2013"

    That's 3.93 cents a share. Compare that to 39 cents per share subsidy for three quarters or 13 cents per share per quarter.

    The subsidy press release:

    What some people don't yet realize is that the Chinese subsidy is a fixed amount per vehicle without regard to the cost of the vehicle. A $5,000 subsidy for a $100,000 Tesla Model S is just 5% but a $5,000 subsidy for a $10,000 Kandi is 50%.

  • Report this Comment On July 07, 2014, at 3:12 PM, Gdubu wrote:

    The question that needs to be asked is why is Blake Bos writing about KNDI in the first place? Blake doesn't own KNDI, he's not short KNDI, KNDI doesn't fall within the realm of his specialization. Blake has obviously failed to conduct a modicum of due diligence about KNDI and obvious too he doesn't understand how the SEC function. Most importantly, Blake Bos obviously knows nothing about accounting theory. What's worse is the Motley Fool editorial staff has obviously failed to check his sources and published whatever he wrote. Is this another case of fool disclosure, versus Fool disclosure, or full disclosure? And why?

    Ironically, KNDI is one of the great emerging growth stock opportunities of our time. It is the ideal situation that Motley Fool claims to want to reveal to its members and readers, and yet it publishes articles like this and others that belittle this great emerging growth stock story.

    So why did Blake Bos write about KNDI?

  • Report this Comment On July 07, 2014, at 3:37 PM, corstrat wrote:

    Actually, Captainccs. KNDI's share is much larger than 50% since KNDI builds over 80% of the EV and then sells it to the JV which finishes the car. The JV's primary mission is to market the car.

  • Report this Comment On July 07, 2014, at 6:50 PM, TMFBos wrote:

    Sorry to rub you all the wrong way; I won't speculate on if Kandi management did something wrong, but only that it's not a good sign to see a company embroiled in such controversy. SEC investigation aside, the accounting issues are my main cause of concern, as they are the most recent and pressing for investors.

    As for my motivations on covering KNDI; i thought this company provided for a great learning opportunity to teach investors some things i would have loved to know in my earlier years.

    On the shares issued question, they were issued in 2010 and look to be for options, general purposes, and debt converts. I referred to the S-1's from April and December for the bulk of them, ~5.6M.

    Wrapping it up; I think it's prudent for investors, of all shapes and sizes, to understand that just because a company is in an index, that doesn't mean they're free of risk. We hear all to often,"Company xyz has to be safe because this bank owns it; or it's in this index". In a quant driven landscape the retail investor can suffer greatly by looking at the wrong details.

    For me personally, the accounting risk and geopolitical risk are far too great. It's up to the individual to make that decision on their own, but they should be privy to this kind of information before doing so in my opinion.

    I wish you all the best of fortunes in KNDI; hopefully they turn out to be a great company!

    I'll be watching the story unfold in the meantime.


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Blake Bos

The Motley Fool's industrials analyst, I specialize in 3-D printing and also do my best to stay up-to-date in the fields of robotics and oceanic transportation. Follow me on Twitter, Google+, and/or Facebook below for the most important 3-D printing industry developments and other great stories.

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8/28/2015 3:59 PM
KNDI $6.73 Up +0.11 +1.66%
Kandi Technologies CAPS Rating: **