Investors who put money into U.S. index funds usually aren’t looking for surprises. Those who bought into the Russell 2000 recently got one anyway: a little-known Chinese stock that went crazy for no apparent reason.
Investors who put money into US index funds usually aren’t looking for surprises. Those who bought into the Russell 2000 recently got one anyway: a little-known Chinese stock that went crazy for no apparent reason. Shares of Wins Finance Holdings Inc., a company that guarantees loans for small businesses in China and leases equipment to them, have soared as much as 4,555 percent since debuting on Nasdaq in 2015. The firm’s market value surpassed $9 billion in February, about four times as much as LendingClub Corp., an online lender with 50 times the revenue. Even Wins said in a release that it had no idea what drove the surge in its stock, which boasts the best performance in the Nasdaq Composite Index over the past 12 months.
So how did a tiny Chinese company make it into the portfolios of U.S. retirees? And how did its biggest shareholder, Wang Hong, become a billionaire, at least on paper?
The mystery begins on the 37th floor of a shiny Times Square skyscraper. That’s where Wins’s U.S. headquarters are located, according to Securities and Exchange Commission filings. But there aren’t any signs of the business. Instead, the floor is occupied by Forefront Capital Advisors, a financial-services firm founded by Bradley Reifler, who used to be on the board of Wins.
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Reifler, whose bronzed complexion matches his golden cuff links, is known on Wall Street for co-founding Pali Capital Inc., a brokerage that at its height was profitable enough, he said, to blow $4 million on a poker party with singer John Legend. Pali went down in flames in 2010 amid a dispute between the two founders, and the firm’s parent company filed for bankruptcy.
Reifler, who filed for personal bankruptcy in January, lives on a 145-acre horse farm in upstate New York. He resigned from the Wins board last year when the company was considering making loans in the U.S., because he wanted to avoid a conflict with Forefront’s lending business, he said in an interview in February.
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About three Wins employees still work in his New York office, he said, but he wouldn’t reveal their names. Reifler also said he doesn’t know who runs the company now, although he mentioned a recent lunch he had with Jianming “Jimmy” Hao, who’s listed in filings as the firm’s chairman and co-chief executive officer.
“I’m very loyal,” said Reifler, who also lets Richard Xu, a former Wins president, work in the office. “If I found something that was wrong, I would have a different feeling.”
The search for answers didn’t go any better at the company’s Beijing headquarters in a three-story building in a quiet compound in the city’s Chaoyang district. A receptionist said that only a few Wins employees worked there and referred inquiries to a woman in human resources who was traveling. That woman, contacted before the visit, had recommended calling the U.S.
Calls to the company’s New York phone number were answered by a man named Neil Gong, who said several times that he needed to ask executives in China about scheduling an interview. No interview was offered.
Giovanni Caruso, a lawyer for Wins in New York, declined to comment.
“We spent hundreds of hours researching the company, and the story has become one of the most abstract in my career,” analyst William McNarland of Eiffel Peak Capital, a merchant bank in Calgary that doesn’t have a position in the company, wrote in a report this month. “The only period that we have seen a stock at these valuations was a few internet companies in the spring of 2000, and we all know how that story ended.”
Wins had operating revenue of $9.8 million in the fiscal year that ended in June and does about two-thirds of its business in Jinzhong, a city in Shanxi province, a coal mining center, according to its most recent annual report. That was a drop of 34 percent from the previous year.
Wins’s main subsidiary, Shanxi Dongsheng Finance Guarantee, was founded in 2006, and its leasing business started three years later. Wins became what it is today after it was bought in 2015 by Sino Mercury Acquisition Corp., a special purpose acquisition company, or SPAC, created by Xu with help from Reifler. Hao financed the deal and was CEO. Sino Mercury was listed on Nasdaq in August 2014, and sold $40 million of stock at $10 a share. Its sole purpose was to acquire or merge with another company.
Investors in such blank-check companies typically put their faith in management, handing over money before knowing what the target is. This method of taking companies public has become increasingly popular in recent years. Reifler had created a number of SPACs at Pali.
When Sino Mercury bought Wins Finance Group, no cash changed hands, according to a filing. Instead, Wins founder Wang Hong became the biggest shareholder in the merged firm, which retained the Wins name. It was a backdoor way to get his Chinese financing company listed on a U.S. exchange.
Before taking the reins at Wins, Hao had been CEO of Shanxi-based grain processor Deyu Agriculture Corp. when its shares tumbled from $8 to less than 50 cents, stinging U.S. investors. Wang served as CEO after Hao left in 2013 and was a top shareholder.
Deyu’s chief financial officer, Peiling “Amy” He, later became CFO of Wins. Xu, who worked on the deal to bring Deyu public in the U.S., said in an interview that it was a good company that had been unfairly tarnished by short sellers. Hao couldn’t be reached for comment. His lawyer, Lian Fang, didn’t follow up on a request for a meeting.
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The current CFO of Wins, Junfeng Zhao, served as financial controller at Agria Corp., a Hong Kong-based agriculture company delisted by the New York Stock Exchange in January after losing nearly all of its value. A spokesman for Agria declined to comment, as did Amy He. Zhao didn’t respond to emails.
Fewer Chinese companies have been listed in the U.S. since a wave of fraud swept American exchanges almost a decade ago. More than 200 China-based firms started trading in the U.S. from 2007 to 2010, according to the Public Company Accounting Oversight Board, which was created after the Enron scandal to establish auditing standards for accountants.
Fifty firms were delisted. Some misrepresented their financials, and others barely existed. Nasdaq has said it is working harder to vet these companies before listing them. Emily Pan, a spokeswoman for Nasdaq, declined to comment about Wins.
Wins Finance Holdings started trading on Nasdaq in October 2015. It was almost removed because it didn’t have enough shareholders—only about 9 percent of available shares are held by institutional investors, according to data compiled by Bloomberg. Wins appealed the exchange’s decision, and said in a February 2016 statement that it would remain listed.
That month the company also said it had switched its principal office to New York, paving the way for inclusion in the Russell 2000. It was added in June, during the index’s annual reshuffling. Decisions are based on a company’s market value, headquarters and location of assets, among other factors, according to the website of FTSE Russell, which runs the indexes.
“Our job is to follow the rules,” said Tim Benedict, a spokesman for London Stock Exchange Group Plc, owner of FTSE Russell. “There’s no subjectivity to the process.”
Inclusion in the index is an event that can boost stock prices, but Wins shares didn’t jump until five months later. Typically, the reaction happens quickly, said Inessa Liskovich, an assistant professor of finance at the University of Texas at Austin who has studied how being added to Russell U.S. indexes can affect share prices.
“The fact that this is all happening in November to me suggests that it’s not linked to index membership,” Liskovich said.
The spike in Wins shares puzzled short sellers. Jacob Ma-Weaver, founder of San Francisco-based investment-advisory firm Cable Car Capital, said the stock became more susceptible to market manipulation when trading volume dropped in August. When a stock is thinly traded, a few transactions can move the price. Intentionally or not, that can lure other buyers who notice the shares surging.
“Maybe the only people being harmed are short sellers, but eventually it’s going to be the underlying holders who lose out,” said Ma-Weaver, who started betting against Wins late last year. “That’s people’s retirement savings that they put in the Russell because they trusted it.”
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The jump in Wins shares may have been driven by a market quirk called a short squeeze, according to Reifler and Xu. In order to bet against a stock, short sellers borrow shares and sell them into the market, figuring they’ll be able to buy them back later at a lower price. In a short squeeze, the people who lent the stock ask for it back before the price has dropped. When the short sellers try to buy back the stock—what’s called covering the short—they compete for the few available shares, driving up the price.
Wins shares have fallen 34 percent since their peak on Feb. 8, and the company is now worth about $6 billion. That’s still almost three times the market value of LendingClub.
Even after Wins was added to the index, insiders and large holders continued to own most of the shares, leaving few for investors on the open market. As of June, about 10 percent of the shares were held by Zhao Peilin and Zhao Jing, who were co-owners of a Shanxi investment company. Together, their stake would have been worth $953 million when the shares peaked. The two also invested in Deyu. Zhao Peilin declined to comment, and Zhao Jing didn’t answer a phone call or an email.
Xu, who resigned as president of Wins in July and moved to a company that buys Chinese grocery stores in the U.S., last reported a holding that would have been worth $92 million.
“I didn’t buy, and I didn’t sell any Wins shares,” Xu said in an interview, declining to say why.
Reifler, who sold his stake in June, said he wouldn’t sell the stock now if he had it because “accusations would be rampant.”
But at least one insider is trying to get out. Majority shareholder Wang Hong inked a deal in December to sell his 67 percent stake for $19.35 a share. That’s a 79 percent discount to where Wins was trading the day he signed the agreement. On paper, at the closing price of $299.19 on March 28, those shares are worth more than $4 billion.
The buyer is Freeman FinTech Corp., a Hong Kong-based financial-services company. Ten former directors face possible sanctions by the local regulator over a failed 2011 deal that cost the firm HK$76.8 million ($9.9 million). Chairman Zhang Yongdong, who was censured by China’s market regulator in 2015 for allegedly manipulating shares of a different company, resigned from his role at Freeman in January, after the Hong Kong Stock Exchange said he was unfit to serve as a director. Zhang now holds the title of honorary chairman.
Wins said that the deal hasn’t gone through because it’s being evaluated by the Hong Kong exchange. If the transaction does close, Wins would become a subsidiary of Freeman, leaving behind a trail of unanswered questions.
Calls to the office of Wins’s guarantee unit in Jinzhong weren’t answered. Wang was the unit’s legal representative as of September, according to Chinese registration records. A spokesman for the Hong Kong exchange declined to comment. Tong Zhao, executive director of Freeman FinTech, said in an email that neither the company nor Zhang could disclose any additional information.
Reifler didn’t seem concerned. “It’s a very serious company,” he said of Wins. “They would have halted trading on the stock had there been a real problem.”