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There seems to be an assumption that the warts discovered in this process do not exist in most other companies. But without similarly exhaustive examinations of those other companies, that seems to me a fallacious argument.

Bingo.

Look, I am not in the habit of trying to talk people into investments. In fact, I'm absolutely delighted when someone as smart as Deej puts his noodle to work and says "yep, not going to do it." It's incredibly valuable to all of us -- including me -- that people share these insights on the discussion boards.

But the above is exactly right. It's not so much that the issues that ShareSleuth discovered aren't relevant. They are. If this stock were trading at an enormous multiple I'd worry about them more than I do. However, the thing you have to realize is that what was written about China Fire is true for almost every Chinese small cap company, and most of the large ones. (And it's no different for Indian companies. Read the shareholder and ownership structure of Sterlite and think about it and you'll likely be horrified.)

Did you know that in Taiwan compensation to managers and directors comes below earnings? So you have, under Taiwanese GAAP, an earnings per share number, that every news outlet in the world reports, and then the real earnings number is completely ignored because multi-million dollar payments to executives and directors is subtracted.

The problems with corporate governance among Chinese companies is systemic. What's worse is that some pretty unscrupulous folks started combing the country a few years ago and started bringing these companies public through reverse mergers into shell companies, which is a cheaper way to go public and creates a much lower threshold for reporting. It also means that the dirtbags who were involved in the previous companies are still involved with the new firms as shareholders, sometimes substantial ones.

When we first sat down with Brian Lin he was talking about getting the company off of the pink sheets and onto the AmEx. This was the advice he'd been given. "No, no, no, I said. The Amex barely gives you any more legitimacy than staying on the pink sheets. Lo and behold, they move to the Nasdaq instead.

Brian Lin has his faults -- he's a young guy who is just learning about the requirements expected of him as a public company listed in the United States. What I find remarkable about Brian is his willingness to listen to us, even when we had no real stake in the company. I told him a few weeks ago that he needed to quit discussing the company's stock price, because it's the kind of thing that breeds distrust among the types of shareholders he ought to want to have, and this was a completely new concept for him. No one had told him this before. But in a week when his own previous missteps had cost him and his shareholders dearly, he did not blame Sharesleuth or Chris Carey. He was baffled by it (remember, there's no such thing as short selling in China), but he blamed himself.

Not saying that means that we should throw caution to the wind, but it's a powerful sign to me nonetheless.

Just so you know, I do not assume that any Chinese company is well managed from an outside shareholder perspective. I am hopeful that the ShareSleuth article shows more of them that disaster awaits if they give too much reason to be distrusted.

Fool on!

Bill Mann

P.S. Starrob, if you want to bring over my and Tim's Gems posts on CFSG, that's fine.
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