Stop me if you’ve heard this one: A clique of canny American banks locates a bunch of new investments that seem on the surface to be promising, blithely looking past any potential problems and, instead, polishing them up and selling them on to an unsuspecting public. By the time the problems are uncovered, the bankers and their clients have strolled away with millions, devastating everyday investors, many of whom have lost large portions of their life savings.
That, of course, is a rough outline of the 2008 mortgage crisis, which almost brought the global financial system to a halt. But it’s also a fair description of another scandal that, as the new documentary The China Hustle suggests, may be a ticking time bomb with the potential to cripple the world’s markets.
Ads for the film, which opens March 30, bill the scandal as “the biggest financial heist you’ve never heard of.” That may be true in the United States, but it’s a story that many Canadians know well, having played out across the country’s business pages for almost seven years (including award-winning investigations by The Globe and Mail).
Still, “there’s not a lot of consciousness about it in the non-business trade press,” notes Jed Rothstein, the film’s director, during an interview at last year’s Toronto International Film Festival, where The China Hustle made its world premiere.
A few years ago, Rothstein met a gruff money manager from small-town Pennsylvania by the name of Dan David in a TGI Fridays at Manhattan’s Penn Station, and was stunned by what he heard. David told him about a series of Chinese companies that had been brought to U.S. stock exchanges by second- and third-tier investment banks such as Roth Capital, a Southern California boutique firm famous for hosting three-day bacchanals in which emerging companies woo investors amid free-flowing booze and extravagant music acts. Sometimes, as Kid Rock or Snoop Dogg whips up the crowd, Roth’s frat-boy chairman performs a middle-aged man’s stage-dive.
Foreigners are barred from purchasing shares directly in Chinese companies, but the banks – including Rodman & Renshaw, whose chairman was the war hero and one-time Democratic candidate for president, general Wesley Clark – found a way for Western investors to participate in the economic boom known as the Chinese Miracle. With the banks’ assistance, China-based companies with names such as Puda Coal, Sino-Forest Corp. and China Green Agriculture found U.S. shell companies – corporate entities that weren’t operating any more but were still listed on stock exchanges – and executed what is known as a “reverse merger.” That allowed the Chinese companies to gain access to foreign investors and their capital without having to submit to the scrutiny of an initial public offering (IPO).
It also, according to Dan David, allowed the companies to commit jaw-dropping fraud. He and others discovered that, in some cases, the companies were overstating their revenues by 1,000 per cent or more. The revelation turned David and his company, GeoInvesting, into what are known as short-sellers, members of a much-despised skeptical species in the financial world who make bets against businesses in hopes of profiting when their value plummets.
“The systemic nature of it that’s alarming and troubling is that we now have a global financial system, we’re becoming increasingly interconnected,” says Rothstein, whose previous films include the Oscar-nominated 2010 documentary short Killing in the Name, about a Jordanian man who lost 27 friends and family members when his wedding was hit by a suicide bomber. “If there’s no mechanism to ferret out these lies other than short-sellers, we’re going to be in trouble.”
Perhaps the best-known of these cases in Canada is that of Sino-Forest, a Chinese timber firm listed on the Toronto Stock Exchange that was valued at approximately $6-billion before a 2011 report by the short-seller Carson Block accused it of being a “Ponzi scheme.” In time, most of that value evaporated. Two weeks ago, the Ontario Superior Court awarded more than $2.6-billion in damages to plaintiffs who accused the chief executive of fraud, breach of fiduciary duty and negligence. (Whether they’ll actually be able to collect anything is another matter.)
Rothstein’s cameras follow David as he tries to raise the alarm with U.S. legislators, who either don’t grasp the scope of the potential problem or fail to see any political benefit in acting on it.
To be fair to the politicians, Rothstein acknowledges the material might not always make for lively viewing. “As a filmmaker, you want it to be like Boiler Room or Wolf of Wall Street or Margin Call,” he says. “But it’s a lot of just guys sitting at desks, talking on the phone, typing, e-mailing, g-chatting.”
At one point, David shares surveillance footage of a company he was monitoring (despite Chinese laws prohibiting the practice) that shows a quiet factory jumping to life shortly before a busload of U.S. investors arrives for a visit, and then going back to sleep once they leave.
It’s quietly galling stuff. And though most of the frauds dissected in the film occurred years ago, a postscript notes that, today, there are more than 100 Chinese-based companies trading on U.S. stock exchanges with a combined market value of US$1.4-trillion.
There is also, inevitably, the matter of Donald Trump. He appears in only two or three brief scenes, but his presidency hangs over the proceedings like a curse. His pledge to deregulate is alarming, considering that the laws currently on the books weren’t enough to prevent the frauds in The China Hustle.
“We are deluding ourselves into thinking that the institutions and people and systems we’ve entrusted to oversee the operation of everything are protecting us,” Rothstein says.
And then there’s the potentially more vexing issue raised by Trump’s comportment. The film shows that “we’re just being lied to in a big way by insiders who are taking advantage of everybody else,” Rothstein notes. He’s referring to the corporate players in the film. But now, the lying has metastasized.
“In the United States, it’s almost become a daily toxic element of the zeitgeist, the lies coming from high places,” he says. “The corroding effects they have on our economic life, on our civic life, are really troubling.”
The China Hustle opens in Vancouver and at Toronto’s Hot Docs Cinema on March 30, the same day it becomes available to rent on iTunes.