Harbin Electric Shares Plummeted: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of China-based electric motors manufacturer Harbin Electric (Nasdaq: HRBN  ) crashed and burned today, falling as much as 59% -- yes, in a single day -- on more than 10 times the average trading volume.

So what: Not content with the severe drop caused by a negative research note last week, Citron Research piled on today with an even more damning missive. Among other things, Citron calls Harbin a "fraud" propped up by a "sham" buyout offer, and it posits that the stock is worth closer to $0 than the supposed go-private price tag of $24 per share.

Now what: I'm usually suspicious of these efforts by a small-time research firm to expose small-cap frauds, particularly when the firm is shorting the shares in question as Citron did with Harbin. But this particular whistleblower actually has a bit of a track record, having attacked Chinese software firm Longtop Financial Technologies (NYSE: LFT  ) with plenty of venom. Trading of that stock was halted in mid-May and remains frozen today as Chinese and American officials sort through a pile of financial fraud claims on reverse-merger stocks such as Harbin Electric.

Harbin's CEO has reiterated his buyout offer along with a bank loan to finance it all -- but Citron says that the loan itself must be fraudulent. You decide who to believe while I treat this stock as toxic. The risks of either buying or shorting shares far outweigh any reward I could imagine at this point.

Interested in more info on Harbin Electric? Add it to your watchlist.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is investors writing for investors.


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  • Report this Comment On June 16, 2011, at 10:35 PM, john795806 wrote:

    Maybe HRBN is fraudulent, but there's no doubt that this attack is timed to coincide with options expiration date, June 18th. The strategy is to buy puts (basically, options short-sells), drive the stock down right before the date, cash in, then buy calls the following Monday as the stock rebounds after the CEO has a chance to respond to allegations. Believe me, come Monday, that will be the end of any negative news on HRBN because they will want the stock to increase---until a week or so before the next options expiration date. This is as predicatable as the sun rising, and I wish TMF would write an article on it.

    It is illegal, technically, but rarely prosecuted. These stock manipulators profit hugely on both ends--even with a relatively small movement of the stock. With these huge movements, they are raking in 100 times (no exaggeration on some options contracts!) their investment in a week. Last month's short attack on YONG was timed in exactly the same manner, driving the stock as low as 3.01 before it rebounded to well over 5. Citron doesn't care if its allegations are true or not--and the fact that they had to go at it twice is telling, basically questioning the CEO's buy-back offer.

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