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These Chinese Business Leaders Are Sick and Tired of Fraud Claims

Anders Bylund
September 7, 2012

Chinese stocks can be tempting. The world's largest nation is breathing new life into its lagging economy, and the middle class is exploding. Who wouldn't want a piece of that growth pie?

But picking stocks in the Middle Kingdom is a risky idea. The nation isn't exactly known for its tight leash on financial-reporting practices, and Chinese companies have come under a steady barrage of criticism from the SEC -- often prodded along by specialized research firms such as Citron Research and Muddy Waters.

Cast of characters
"Who will save us from Chinese fraud?" asked fellow Fool Dan Newman last December, with the tentative answer being Muddy Waters. Though Dan questioned the firm's ethics, he liked the accuracy of its fraud reports. The firm accused Orient Paper, Spreadtrum Communications (Nasdaq: SPRD  ) , and Focus Media (Nasdaq: FMCN  ) of committing 50 shades of fraud, and none of these stocks have recovered from the market damage Muddy Waters caused.

But when Foolish analyst Sean Williams looked into these research firms, he found that bad business ethics met questionable reporting. Citron and Muddy Waters weave a tangled web of self-serving conflicts of interest, and it's hard to say whether you should trust their reports or the management teams they're accusing of fraud.

This week, a consortium of China-based businessmen, investors, and analysts had enough of Citron and friends. The group started a website with the ominous title "Citron Fraud," where you'll find Citron founder Andrew Left accused of fraud himself. "China is not well understood by foreign investors, so we urge investors to seek trustworthy professionals for investment advice regarding Chinese companies, and not rely on institutions and individuals with fraudulent history, falsified expertise, and serious interest conflict," the group says. In particular, they point out that Citron got burned on engine manufacturer Harbin Electric, which was supposedly a shell game of bogus bank loans -- until Harbin's founders took the company private at a generous price premium and left short-sellers like Citron licking their financial wounds. That so-called "sham buyout offer" turned out to be very real.

Why should I care?
None of this would matter if we were talking about a bunch of no-name entrepreneurs or defensive short-seller targets. But this consortium comes with brand-name backing.

Among the people putting their John Hancock on this diatribe, you'll find representatives from well-known Western investment f