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Muddy Waters - CCME_IrrefutableEvidence_030211

Muddy Waters - CCME_IrrefutableEvidence_030211

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Published by Ash Goyal

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Published by: Ash Goyal on Sep 27, 2011
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2
Muddy Waters, LLC has amassed irrefutable evidence that China MediaExpress Holdings, Inc. (“CCME”) is a substantialfraud, and that management is engaging in a cover-up replete with further dissemination of fraudulent information. Inlight of the nature of the evidence, we believe that a de-listing from NASDAQ is not improbable; further, we believe thatmanagement stands to lose additional credibility. We therefore reduce our estimated value by one-third to $3.54.
 
We present a recorded telephone conversation that contains an admission that CCME is engaging in securities fraud. Theconversation took place on February 23
rd
between the CCME salesperson who provided us with the advertiser kit we citedin our February 3, 2011 report (the “Report”) and one of our analysts. The CCME salesperson initiated the conversationwithout notice in response to investigative actions taken by CCME’s auditor, Deloitte Touche Tohmatsu (“Deloitte”).During the conversation, the salesperson stated that:
 
CCME has been doubling the number of buses on which it has installed equipment for purposes of its SEC filings;and
 
CCME replaced recently replaced the salesperson’s hard drive due to the increased scrutiny.The recording with subtitles is available at: http://www.youtube.com/watch?v=cLAm-dJh2fIWe document that in the course of rebutting our Report, Chairman Cheng provided fabricated information. In ChairmanCheng’s February 7, 2011 letter (the “Chairman’s Letter”), Chairman Cheng challenged our assertion that CCME’s largest purported contract does not exist. His proof includes an “excerpt” of buses he claims are covered by the disputedcontract. The excerpt contains license plate numbers of three buses. We have official documentation (shown in AppendixA) from the Shanghai Public Security Bureau Traffic Management Administrator (the “Traffic Administrator”) that showsthese three license plates numbers are fabricated.We present the sales presentation we received in January from the aforementioned salesperson (the “Sales Presentation”)that shows CCME has fewer than half of the buses it claims. The Sales Presentation (Appendix B), which shows CCME’s buses by province and city, corroborates the following facts we presented in our earlier Report:
 
CCME has fewer than half of the buses it claims; and
 
its largest purported contract (with Shanghai Ba Shi for 1,892 buses) does not exist. The number of buses for Shanghai-based operators in the presentation matches the number in the spreadsheet we received – 296.We present a mini-documentary of the largest purported operator – Shanghai Ba Shi – specifically focusing on its inter-city buses and drivers. The film shows that CCME’s hardware is not installed on the buses, despite CCME’s claim tohave had hardware on these buses since at least mid-2008.The video is available at: http://www.youtube.com/watch?v=-COZ5l9ayzMIf one questions whether it is Muddy Waters, LLC – and not CCME – that has fabricated information and documents, we point out the following. Our research director and sole member manager, Carson Block, is a United States citizen withassets and family in, and significant ties to, the United States. Although we do not know the extent of CCMEmanagement’s ties to the United States, we venture to guess that they are significantly less than those of Mr. Block.
 
 3
II. CCME Sales Representative’s Admission of Securities Fraud
 Background 
In January 2011, we cold called CCME’s headquarters in Fuzhou. We asked to speak with the sales department, and wewere transferred to a salesperson. During the course of our conversation with the representative, we described ourselvesas a medium-sized company that was interested in advertising throughout China on CCME’s buses. From that point on,our dialogue with the salesperson mainly took place over instant messenger. The salesperson sent the electronic versionof the advertiser kit via instant messenger – including the Excel spreadsheet we subsequently posted on our website inPDF format, as well as the Sales Presentation shown in Appendix B. During the course of the dialogue, the representativeand we discussed the fact that CCME is publicly traded in the Untied States.As has been well documented, we released our February 3, 2011 report during the lengthy Chinese New Year holiday.Following the holiday, the sales representative followed up with us about buying the ads we had discussed. At that time,our analyst told the salesperson that he and his manager had left their jobs with the potential advertiser.On February 23
rd
at approximately 13:00 China time, we sent a detailed letter to various partners at Deloitte with previously unreleased evidence supporting our allegations of fraud. Around 19:00 the same evening, our analyst receiveda phone call from the sales representative. The purpose of her call was to ask our analyst whether someone inside his“former employer” disseminated the Sales Presentation outside of the company. She evidently had not considered itlikely that the person with whom she had been speaking represents Muddy Waters, LLC.Because our analyst was unprepared to receive the call, he was only able to begin recording it after approximately twominutes. He believes that substantially all information that had been discussed during the initial unrecorded period isrepeated in the recorded portion.
The Conversation
We encourage investors to listen to the recording with subtitles, available at: http://www.youtube.com/watch?v=cLAm-dJh2fI However, we provide the following translated excerpts (emphasis in bold added) of the conversation – thecomplete transcript is in Appendix C:
Analyst: Yes. I could call him, but… Sorry, I want to help you – I don’t want to cause you any trouble. So couldyou please explain the situation to me?CCME Rep: The situation is just what I’ve told you. Say for example we have 1,000 vehicles, 1,000 is the number we quote to outsider. But I have only quoted 500 vehicles to you, because these 500 vehicles are already signed withcontracts and installed with devices. The other 500 vehicles don’t have devices installed, so the number I quoted to you isthe actual number, installed with devices, but our company has asked us to claim based on 1,000 vehicles.Analyst: Ok, I see, but what’s the relationship to your quoted price?CCME Rep: There are some conflicts. For example…

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