From Glaucus Research:
We recently conducted extensive due diligence on Gulf Resources, Inc. (“GFRE” or the “Company”). Our research included factory visits, examinations of U.S. and Chinese financial filings, and discussions with company representatives, vendors and local government officials.
In our report, we present compelling evidence that a rival, privately-held Chinese conglomerate owned by GFRE’s chairman and founder, is actually the legal owner of GFRE’s factories and operating assets. We believe that, given the difficulty of litigation in China and the complex multi-jurisdictional organizational structure of GFRE, shareholders are most likely left without a remedy.
In short, investors in this NASDAQ-listed company are likely holding worthless paper in a shell company.
In addition, we present evidence that GFRE engaged in an inappropriate self-dealing transaction, the details of which GFRE intentionally concealed from the SEC and investors, that GFRE’s largest customer is privately owned by GFRE’s chairman, that GFRE engaged in dubious capital expenditures that may have been a smokescreen for transfers of cash to insiders, and that GFRE is exaggerating the size of the company’s operations. We also present evidence that the company’s CEO has a close relationship with a notorious puppet master of Chinese small cap scams.
Below are the highlights of our report:
- A privately held Chinese company, owned by the founder and chairman of the board of GFRE, claims to own and operate all of GFRE’s assets and business. This suggests that the chairman sold investors shares of a worthless shell entity while keeping the underlying business under a separate privately held conglomerate. Given the difficulty of litigating in China and the complex multi-jurisdictional corporate structure of GFRE, shareholders may have great difficulty in recovering any value from the company.
- GFRE engaged in inappropriate self-dealing by massively overpaying for a business owned by its chairman and his family.
- GFRE has failed to disclose that its largest customer is a related party.
- We visited each of GFRE’s factories and each appeared far smaller than indicated in GFRE’s SEC filings. A representative from a local government office confirmed that GFRE’s production was substantially smaller than GFRE’s claims in its public filings.
- GFRE’s CEO has omitted the fact that he was formerly the CFO of China Finance Inc., a notorious purveyor of fraudulent Chinese microcap companies.
- GFRE commissioned two contractors to perform two expensive capital expenditure projects. Despite a thorough investigation, we have been unable to find any evidence that either contractor is a working business. We believe that management may have used these suspicious capital expenditure projects as a vehicle to transfer money out of the company.
- BDO Limited is GFRE’s 3rd auditor in 4 years. GFRE dismissed its previous auditor, which had questioned the effectiveness of its internal controls, immediately prior to the release of GFRE’s FY 2009 Form 10-K, and replaced it with BDO limited, an auditor that has represented other publicly listed Chinese companies which have committed, or are accused of committing, fraud.