In the comment section below on my last post on Migao someone has raised two valid arguments in defence of Migao. I am happy that someone has brought these points forward because as I will point out although these arguments appear valid at first, upon deeper investigation, they are not really valid at all.
The first argument is that the potash deal is ‘legit’ because the CEO has pledged $95M in his own shares to restore investor’s confidence in the potash agreement and to protect against possible default from the mystery supplier
There are two things fundamentally wrong with this however.
1) We will never know whether or not the potash supplier did default on the agreement. It is not the auditor’s duty to confirm where supplies of potash came from and therefore Migao could tell us that supplies of potash came from this mystery supplier and we would never be able to prove it one way or the other.
2) The second reason why this pledge means essentially nothing is that as discussed in the post below if the transaction is fraud then the shares are essentially worth nothing anyways and therefore the CEO’s pledge is essentially worth 0.
The second argument in defence of Migao is that insiders have bought over $1.4M shares in the last month.
I believe that this is just a little bit window dressing. As per this article, the amount of purchases compared to sales is clearly insignificant and the article states that the ratio of shares sold to shares purchased was 65 to 1 back in March. So clearly these share purchases are insignificant when looking at the whole picture.
The same thing could be said about their share buyback program that they announced. It will be interesting to see how many shares they actually buyback. This wouldn’t be the first time an alleged Chinese fraud has announced a share buyback program.
