By Contributing Editor, Jay Thompson

Tantech (TANH): Chinese Round-Tripping Fraud, Suspect Officers & Boiler Room Bankers

We feel very fortunate to be the first to write extensively about Tantech. This is one of the most blatant stock manipulations we've seen in years. Tantech Holdings Ltd (TANH) listed on the Nasdaq on March 24, 2015.  Only 1,600,000 shares were registered in the initial public offering ("IPO") - as seen below.  As a result, TANH has been an extremely low float stock since its IPO.  Now, all of a sudden, as of September 21, 2015, another 18.4 million shares are available to sell and those shares are owned by the management of TANH - albeit indirectly.

Source: http://www.sec.gov/Archives/edgar/data/1588084/000114420415018748/v40560...

Management and Insider Selling

The low float appears to have allowed TANH or its affiliates, shareholders or bankers, to manipulate the stock over the last six months to the point where this Chinese-based company sported a market capitalization of $734M as of September 1, 2015. Amazingly, according to its recently filed Form 20-F, TANH, almost a billion dollar company, generated just $512,409 (i.e. $2,460,362 + ($1,947,953)=$1,024,818/2) in cashflows from operations in the years ended December 31, 2014 and 2013, combined.  We focus on the measure of cashflows from operations rather than net income because cashflows are harder to fake or manipulate than net income - and Chinese companies have routinely succeeded in reporting inflated income in the past several years.

Generally speaking, investors are protected against insiders selling their shares without notice.  Officers are required to file a Form 4 with the SEC whenever they buy or sell shares. Large holders who are not officers are also required to file with the SEC, usually a Form 13. However, the fines for not filing Form 4 or Form 13 are not of the magnitude that would likely dissuade a selling shareholder who is protected by the Chinese government. So, realistically, as "investors" continue to trade out of TANH shares you can be sure those "investors" include the management of TANH - whether they are selling directly or indirectly is the only question. On September 23, 2015 TANH's shares closed at $19.83 - approximately 42% from its high on September 1, 2015.

The CEO was Previously CEO of NANI - Whose U.S. Registration was Revoked by the SEC

But he doesn't want you to know that. Mr. Wang's biography in TANH's recent annual report filed on Form 20-F fails to mention his involvement with Neologic Animation f/k/a China Forest Energy Corp (NANI). See his bio provided by TANH and his bio provided by NANI below.

Source: http://www.sec.gov/Archives/edgar/data/1588084/000114420415026568/v40697...

Source: http://www.sec.gov/Archives/edgar/data/1371310/000106299311003121/form10...

We also noted he omitted his MBA from Fudan in the TANH bio. He does list it in the NANI bio. Maybe that was a slight error in his old bio perhaps? Its ok, not all of us remember our schooling days. We can't blame him for all of the losses incurred by NANI shareholders - he wasn't the CEO for the entire trainwreck of an existence that company had - it looks like he was the one who got the train rolling in the wrong direction though. The SEC was kind enough to revoke NANI's registration. Meanwhile, NANI shareholders have Mr. Wang to thank as they lost every penny they invested.

The CFO is a Veteran of the Chinese Reverse Merger Scene

Look at this. How does someone who was previously the Chief Financial Officer of a halted, disgraced NYSE-listed stock, China Gengsheng Minerals ("CHGS") get a job as the CFO of TANH?  Did TANH think that no one would notice their CFO's track record? Is the SEC aware of this CFO's involvement with TANH? We are sure the shareholders of CHGS remember him.  They lost every penny they invested back on May 19, 2014 when CHGS was halted. 

We are feeling quite confident that the shareholders of TANH will experience the same outcome as the CHGS shareholders. 

Banking Failure

We noted that TANH first filed for an IPO on September 30, 2013 and on March 3, 2014 first listed Newbridge Securities as TANH's underwriter within the F-1 filing.  By January 2015, Newbridge was fired and ViewTrade Securities was hired by TANH as its placement agent. This IPO was only scheduled to be for $12.8M (i.e. 3.2M shares x $4.00). The fact that Newbridge could not raise the $12.8M is alarming. Further, TANH must have felt quite under pressure at the time, after having approximately 13 amendments to its Form F-1 filings and a seemingly neverending inquiry session with the SEC. As a result, TANH turned to ViewTrade to raise the funds at a downsized rate, 1.6M shares at $4.00.  Not only was this at the low end of the price range but TANH was only able to sell 50% of its intended offering.

Source: http://www.sec.gov/Archives/edgar/data/1588084/000114420415026568/v40697...

We note that the gross vs net difference in the offering was $1.3M or 20.3% of the gross proceeds. Those are some very very high fees and are approximately 400% of the fees outlined in the ViewTrade placement agreement filed with the SEC.  We are very curious what additional compensation was included in the $1.3M.  Was ViewTrade given some extra fees with the understanding that they would create a market for TANH's shares? It sure seems like someone was. TANH was a no-name IPO, was not underwritten, and somehow traded $1.4M on its first day of trading and $2.3M on day two (calculated using low price of the day and total share volume). Who actually purchased the 1.6M initial IPO shares? TANH has a long history of related party transactions - was this an "arm's length IPO?"

A even better question, the investors in the IPO valued TANH at $80M ($4.00 x 20M shares o/s) and on September 1, 2015 the market capitalization was $734M. Is it true that nothing happened in those six months that justifies the ridiculous increase in value? We think so.

Auditor has History with Chinese Reverse Merger Frauds

TANH selected its auditor, Friedman LLP, perhaps without the knowledge that this auditor was also the auditor for a select group of Chinese reverse merger frauds. A preliminary search identified a report listing Friedman LLP as the auditor for NIVS, FABU, CNYD, KGJI and HGSH. Investors lost hundreds of millions of dollars as a result of these frauds. Friedman LLP appears to still be operating even so. It does appear as though the Public Company Accounting Oversight Board ("PCAOB") has their eyes on Friedman LLP however.  We noted a few issues with their work. It appears they have a hard time auditing revenues. Perhaps TANH's revenues have not been audited by the best and brightest auditors out there.

Source: http://pcaobus.org/Inspections/Reports/Documents/2013_Friedman_LLP.pdf

Signs of Round-Tripping Fraud Scheme

We noted a variety of related parties that TANH does business with and have provided the list TANH disclosed in its recent Form 20-F filing below.  We researched each of these parties and found several questionable relationships. These Chinese frauds all use the same play book. They are advised by people who know exactly how to trick auditors and even the SEC. Muddy Waters Research provided an overview of the play book - they refer to it as "fraud school."

We also noted the following disclosure:

Revenues and Accounts Receivable are Questionable

TANH has disclosed in the above chart that it has four customers that TANH shareholders (who are affiliated with management) also own. However, TANH does not disclose within the Form 20-F how much business these customers do with TANH and whether or not that business is at arms length. We fear it is not. We also noted that one of these customers also provides working capital loans to TANH. Further, another customer is not just a customer but also a supplier. We remember quite a few of the Chinese frauds over the past few years had similar arrangements. Those companies turned out to be frauds. The signs are there for investors. You just have to look.

Also, what about the collection of the accounts receivables from companies that TANH shareholders also own? Is TANH likely to collect those balances or will TANH management's obvious conflicts of interest cause them to consider writing off balances owed to TANH as a favor to Forasen, for example? TANH's CEO Mr. Wang has a history of forgiving debts between his entities. See below:

Mr. Wang likes to loan funds between his companies quite often actually. We had a very difficult time tracking the movement of funds by TANH and Mr. Wang. We question if TANH's auditor successfully followed and understood all of the related party transactions between TANH, Mr. Wang's and all of these entities listed above. Howe was fair value determined when two entities owned by the same parties conducted business?

We noted TANH had several major customers during 2014. Why hasn't TANH listed off the names of these customers? Are they related parties?

Costs of Revenues are Questionable
 

We also noted that TANH is supplied raw materials by its related parties as well. We wonder how TANH determines the pricing for those raw materials. We noted the SEC had the same concerns when they reviewed TANH's Form F-1 filings. The SEC noted that TANH's closely related entity Forasen Group, has many of TANH's products on its website as well. Forasen Group appears to be competitive with TANH - or possibly Forasen Group is real and TANH is a frabrication. Its difficult to tell - that is for sure. We wonder how TANH's auditor dealt with this.

We noted TANH had several large suppliers in 2014. Are any of these suppliers related parties?

It would make sense to us that TANH's customers and suppliers were significant during 2014. We noted TANH reported $65.5M in revenues for 2014 and had $43.6M in accounts receivable at December 31, 2014. This equates to an AR Turnover ratio of 1.5. This ratio infers it takes TANH 8 months to collect its billings from its customers. If Mr. Wang is in charge, and he is, then we can see his related parties paying him this slowly, he's ok with it. It just takes some time to move the money around.

Still, TANH has failed to disclose how much of its revenues and costs of revenues are from related parties. So we may never know the answer - unless TANH's shaky auditor (see our notes below), Friedman LLP, can figure it out.

Advances to Suppliers are Questionable

We remember several Chinese reverse merger frauds that involved a reference to "advances to suppliers." TANH reported $10.6M in "Advances to Suppliers" as of December 31, 2014. TANH's auditor questioned these balances as well and TANH has provided a small reserve for losses associated with this account. Why would they do that? Does TANH not trust its suppliers? It makes perfect sense to us to advance $10M to a Chinese company and hope that they give you value in return. We've only heard of Chinese companies not complying with a contract only a few times - sarcasm folks. These are important questions and TANH has not provided anywhere near enough disclosure to sway investors fears that the $10M will in fact be repaid in the form of goods or cash at some point in the future. Of course, if these advances are held by related parties than we have the same issue as previously discussed...will Mr. Wang simply forgive the balance and allow his other company to keep the money?

These are our preliminary thoughts on TANH's legitimacy. As you can see we don't think highly of the company. However, we have not and will not complete any "groundwork" as others have done with other Chinese companies in the past. We do not plan to visit China and see TANH's offices, look for their products in stores, ask 500 Chinese individuals if they've heard of TANH's products before etc. We do hope someone will do this though. We are very interested in what they find.

Fraudulent Investment Banker

We had never heard of ViewTrade before. They do seem to have a website and a small office. So thats something. What is most interesting to us though is their history. ViewTrade, the firm, has a few notable regulatory filings. Below are just a few clippings from their firm summary provided by the Financial Industry Regulatory Authority ("FINRA").  We see a similar trend here.  Both TANH's CEO, CFO and their banker have checkered pasts - did they think no one would ever come across this history? Seriously, look at some of these allegations and charges against ViewTrade - and note the first allegation for telemarking - it looks like they had (and may still have) a boiler room!

Source: http://brokercheck.finra.org/Firm/Summary/46987

The Boiler Room Bankers Themselves

ViewTrade's investment banking team:

Below are a variety of settled actions against these individuals. To summarize, these individuals collectively have been accused and settled/charged on various counts of securities fraud, stock manipulation and even theft. Unbelievable.

Mr. Douglas K. Aguillia:

Mr. Claude Ware:

Mr. Alan Jacobs:

Mr. Brian Herman:

ViewTrade's Track Record

ViewTrade-led deals have all failed thus far, with the exception of TANH (so far). We review their list of deals at their website and are providing the stock charts for each deal below.

Qualifications of Directors

We didn't research TANH's directors for very long but did come across some information about Wencai Pan. Although his financial acumen appears to be what TANH suggests makes him suitable for TANH's Board of Directors, it appears Mr. Pan failed to pass the CPA exam in Florida. That doesn't inspire confidence. We wonder what other skills he has.

Business Purpose of Recent Related Party Transaction

On August 19, 2015, TANH announced a new related party transaction to purchase the remaining 5% of its subsidiary that it doesn't already own. What is business purpose of buying out the 5% of Bamboo Tech? Why weren’t these family members bought out a long time ago? It could cost $10-$11M to buy them out. That is cash TANH doesn’t seem to have right now and also a lot of money for Chinese individuals. Why is a 60% discount appropriate here when their shares represent the direct ownership of TANH's business whereas US shares are subject to risk of international law and lack of authority in China?

Additional Disclaimer:

We are short shares of TANH. We may add to our short position at any time. All information included within this report is sourced from publicly available materials. We have not communicated with management of TANH, their bankers, their shareholders or anyone associated with the company.