In response to the accusations by Alfred Little, Deer Consumer Products submitted to the U.S. Securities and Exchange Commission a picture of what it claimed was a land use document. Alfred Little claimed that the document was a sophisticated forgery. (Deer Consumer Products)

The technology involved in making electric can openers is pretty well settled. The market is established, the techniques limited, and margins not exactly fat. But Deer Consumer Products, which claims to be a “market leader” of kitchen appliances in China, claims that it achieves profit margins of up to 30 percent in its business—which would put it far ahead of any competitor.

In a search on Taobao, China’s version of Ebay, however, Deer does not appear anywhere near the top in its class of companies. This fact, and an unusually high price paid in a land transaction, caught the eyes of short sellers, who last year issued a series of reports alleging fraud in the company.

Deer Consumer Products is listed in the United States on the NASDAQ Global Select Market stock exchange, and its shares may be bought and sold by U.S. investors.

The company diversified its response to critics: in the United States it sued Alfred Little, a pseudonym used by one of the short sellers who had accused it of fraud, and in China it began harassing and intimidating the investigators Alfred Little had hired, according to statements made by Alfred Little in response to the lawsuit.

It’s a clever strategy, says Roddy Boyd, an author and publisher of the blog The Financial Investigator, who has written about Deer. “Deer Consumer Products and its lawyers are never going to show up in a court room in front of 12 jurors and make an argument that they’re a good company. They’re not going to allow discovery, and no one will be allowed to look through their email servers. This is a gambit,” he said in a telephone interview.

By forcing Alfred Little into a protracted legal dispute, and harassing analysts the company hired in China, “anybody who is going to write about Deer in a material way” is now put on notice, Boyd said.

Land Scheme

Deer’s escapades have made it a target for short sellers, investors who promise to sell a stock at a lower price because they believe the company’s stock price is inflated. Some conduct research, publish their findings, and stand to profit when the stock drops in value.

The most egregious of Deer’s alleged frauds, described by Alfred Little in a March 18, 2011, report that was cited by Deer’s lawyers in a court submission, and elaborated upon further on Alfred Little’s website in response to the lawsuit, was that the company had claimed to pay tens of millions of dollars more for land than it actually did.This extra value appeared on the company’s balance sheets—which investors use to decide what the company is worth—but the difference between the real cost of the land and what the company paid remains a mystery.

Deer management reports paying $37 million for land use rights, but never mentioned that it got $21 million in rebates, according to Alfred Little.

Using surreptitiously recorded phone calls, on-site visits, and emails with government officials, Alfred Little claims (in a report put at issue in Deer’s lawsuit) it discovered that Deer has stolen millions of dollars from shareholders through this means.

According to the Alfred Little report, the land scheme works as follows: Party Central in Beijing sets the prices of “shovel ready” land for industrial buyers in 120 economic development zones across China. The price depends on the grade of the land. In the case of Deer, the Ministry of Land and Resources gave the land it wanted to buy a “Grade 6,” and a minimum price of about $217,000 per acre. That’s expensive for land in a rural area, but local governments are mandated to sell at that price—further, most of the revenue for local-level Party committees across China comes from land sales, so bureaucrats are heavily incentivized to attract investment.

And to do so they offer perks, like large cash rebates. Alfred Little reported that, by calling around to government offices and posing as businesses with a similar profile to that of Deer, it established that Deer paid $21 million less than it said it did. This included an inflated original price—above the minimum mandated—as well as a rebate. Deer claimed that it paid so much for the land (about $316,000 per acre) because of a competitive auction.

But, after more phone calls, Alfred Little also reported that local bureaucrats structured the deal such that auctions never occurred. Deer claimed the official Alfred Little spoke to, Mr. Liu, did not exist. Alfred Little then made more phone calls to Liu and posted the audio recordings on their website.

Deer later produced what it said was a certificate of land use rights, including an official seal. But, according to Alfred Little, when its researchers took a copy of the document to the Wuhu Municipal Bureau of Land & Resources, quoting the certificate’s serial number and asking that they verify its authenticity, office workers could not do so.

Another analyst, GeoInvesting, published a report saying that it had corroborated Alfred Little’s findings on Deer.

If the Alfred Little report is accurate, the land caper would mislead investors into overvaluing Deer’s assets.

Deer took action to keep its stock price artificially high. Roddy Boyd, publisher of thefinancialinvestigator.com, brought forth a Financial Industry Regulatory Authority Broker Check report showing that Deer paid $350,000 to a penny stock salesman, Talman Anthony Harris, in order to maintain the price of the company’s shares between November 2010 and February 2011.

Boyd believes he has not been sued because he referred only to publicly available documents. Alfred Little investigators in China, however, did not get off so easy.

Harassment Reported

According to Simon Moore, editor of AlfredLittle.com, the website operated by anonymous short sellers who employ Chinese researchers, two of the website’s contributors have been kidnapped in China by “corrupt police.”

He could not identify locations, times, or actors, however. “Reporting on any specific details regarding these kidnapping situations would risk angering companies and could result in further kidnappings and other retaliatory threats,” Moore wrote in an email to The Epoch Times.

Chinese companies are able to mobilize local police to harass its opponents, according to Alfred Little.

An affidavit submitted by the short seller in response to Deer’s lawsuit also alleges two cases of separate harassment: a lawyer conducting research being pistol whipped and threatened with death because the company could lose millions of dollars if his research was published, and another lawyer being kidnapped by people hired by the company and held in a hotel for three hours.

Neither the SEC nor NASDAQ would comment on Deer. Alfred Little believes that an investigation may be ongoing, however, after a request for information by lawyers resulted in a denial citing Exemption 7(A), which requires that an agency must be able to “point to a specific pending or contemplated law enforcement proceeding,” according to the U.S. Justice Department.

Alfred Little claims to be a group of contributors that publishes its work through a website. One particular, anonymous short seller also calls himself Alfred Little. That individual is going to try to remain anonymous throughout the legal proceedings.

“Though I consider myself a friend of China and my efforts to expose fraud and corruption in the best interest of the Chinese people,” he writes, “given the Chinese state’s well-documented abuses of official authority and long-standing lack of rule of law, my personal safety and well-being would be in serious jeopardy if my true identity were made public, allowing my enemies in China to abuse their connections to state power.”