Citron Research's investigative report on Qihoo has created a storm among many Chinese who have hit back at Citron. Citron is a United States-based investment newsletter run by short sellers and Qihoo a Chinese browser company listed in the US.
Led by former president of Google China Kai-Fu Lee, 61 veteran Chinese investors and executives sent a joint protest letter to Citron on Sept 4, accusing short sellers represented by Citron of spreading disinformation to malign China-based companies. Their anger is totally justified, because in the past, some short sellers made up stories and then tried to defend their contentions with more fabrications feigning to bring order to the investment market.
This time, Citron has exploited US investors' lack of understanding of Chinese companies and their fear of loss.
Short selling is a common practice in mature capital markets and acts as market detergent. It is supposed to be an effective self-disciplined mechanism to counterbalance fraud. But what happens if the detergent itself causes pollution?
Short sellers are no different from the companies they investigate, because their motive is also to make profit. Their investigations do expose the frauds committed by other companies. But how do we expose the wrongdoings of a short seller, the self-appointed watchdog of the market?
Short sellers' reports are loaded with "explicit facts" to warn shareholders, and thus make money from investors' fear of losing money.
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