They would first short the shares, and then publish a report that contains inaccurate and false information, causing large drops in stock prices, knowing that the American readers would have no way of verifying the information, and that the Chinese companies do not know how to fight back.
This has been changed recently. A group of Chinese businessmen have been responding to one particular short seller, Citron Research, by: writing a paper exposing eight major errors in a Citron report on China video and search markets (for example demonstrating Citron totally misunderstood the core product offered by the company being reviewed, which Citron has subsequently admitted), writing another paper disproving another accusation made by Citron on China games market. All of the above have been captured by a website called citronfraud.com.
Citron's reaction is also very telling. It responds first by enumerating its historical performance (not relevant to the very specific errors pointed out). It then resorted to personal attacks. It finally threatens lawsuit (but it avoids addressing any of the specific errors called out).
But these tactics will not work. Today, several legal actions were initiated, including one by Qihoo 360, the company attacked six times by Citron, and another by myself addressing defamation. At courts of law, the discovery process will prove the severity of Citron's errors, and also uncover what's really behind the Citron -- is it a one-man show, or are there more powerful people behind it.
Short selling is a fine practice, and there is no problem with writing analysis. But if the analysis provided is false, it seriously hurts the companies and other investors. This kind of practice must stop, or be stopped.
For more information, see www.citronfraud.com
