KGJI: A ‘Fraud School’ Success Story

“Investors shouldn’t have to worry about the officers, directors and stock promoters taking advantage of them.”

NASDAQ Official

IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article represents the opinion of the author as of the date of this article. This article contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.


The boom of Chinese companies that conducted reverse mergers to populate U.S. exchanges long-ago unraveled in a wave of fraud that left investors with massive losses. Marketwatch’s Francine Mckenna wrote in a July, 2016 article, that “More than 50 U.S. listed Chinese companies were either delisted or halted from trading in 2011 and 2012 based on claims of fraud and other violations of U.S. securities laws.” After the fraud boom, the article explains that Nasdaq enhanced its due diligence practices to scrutinize listings:

“Once Nasdaq noticed that many of these reverse merger companies shared promoters, directors, audit firms, and other professional services firms, we started analyzing the network”

That is why we were surprised to learn that Kingold Jewelry (NASDAQ:KGJI), a Chinese reverse merger that has awarded hundreds of thousands of shares to dubious stock promoters, continues to have a NASDAQ listing. This year, hyperbole and gold-driven promotional narratives have sent shares surging from less than $0.50 to a high of $2.80. The company recently filed an $80 million shelf offering and implied last week that it will soon raise fresh capital.

Before deciding to send additional millions overseas, we believe that U.S. investors deserve to have the facts. As part of our due-diligence, we obtained thousands of pages of Chinese-filed documents related to Kingold and its undisclosed affiliates.

Our research has uncovered a typical mix of Chinese reverse-merger characteristics: business claims that defy logic, fabricated SEC filings, false company statements, and undisclosed related party transactions. We think it is obvious that Kingold is a dramatically smaller company than it claims to be but, even worse, documents we obtained from the People’s Bank of China show that Kingold has made undisclosed asset pledges (primarily to the Chairman’s affiliates) in amounts that exceed Kingold’s Chinese-reported shareholders equity. We are also concerned by very recent Chinese media coverage regarding Kingold’s potential involvement in the Shanghai stock market trading activities of related parties.

Investors are strongly encouraged to conduct their own due diligence into these factors.

Note: All information for this article was derived from publicly available information. The author(s) have a short position in Kingold Jewelry. Investors are strongly encouraged to conduct their own due diligence into these factors.

Kingold Was Touted By The Chinese “Fraud School” As a Success Story

Muddy Waters, a research firm that has exposed many Chinese frauds, authored a White Paper on the organized network that brought numerous fraudulent companies onto U.S. exchanges. The presentation and research paper, Frauducation, cited a 2012 Chinese Today’s Fortune article that discussed an investigation into a Chinese “fraud school.” The article (translated into english) describes a “systematically criminal” platform:

the “fraud school” is a small investment bank and financing counseling company. It uses a network of accounting firms and law firms based in HK and US to jointly operate to present “trash” enterprises as fast-growing and huge-profitmaking super stars, thus catching the foreign investors’ eyes, gaining private funding, and subsequently going public in the US….After that, they will keep coaching the firm on producing falsified reporting documents in order to make it keep “growing” with the eventual goal of listing on a primary exchange (i.e. NYSE or NASDAQ) and collect even more money from US investors.

While the investment bank leading the fraud school was not specifically named in the article, the research paper highlighted the likelihood of it being a Hong Kong outfit named Chief Capital. Although Chief Capital’s website has since been deleted, we found Wayback Machine archives showing that KGJI was featured as one of Chief Capital’s many “Success Stories”:

Source: Wayback Machine. June 6, 2011 capture.

Of the eight U.S. “classmates” pictured above, Kingold is the only company still trading on U.S. exchanges. Chief Capital’s alumni have left western investors with severe losses and have included high profile frauds such as RINO International (OTC:RINO) (below).

Source: Marketwatch

Kingold had originally attempted a Chinese IPO but was rejected by the Chinese Regulatory Commission on account of “abnormally rapid revenue growth.” A month later, Kingold engaged Chief Capital and subsequently completed a 2009 U.S. reverse merger. Chief Capital (in the below profile) states it facilitated this process by providing substantial audit assistance to Kingold. The firm even issued a press release congratulating their “client”, KGJI, on a successful NASDAQ listing.

Source: Wayback Machine. November 5, 2011 capture. Translated by Google. Kingold is also called Wuhan Golden Phoenix Jewelry

The Frauducation white paper also examined the audit firm of Jimmy C.H. Cheung & Company. Cheung was the earliest auditor of record for RINO and audited ChinaCast (OTCPK:CAST) which, according the SEC, was a “massive” fraud. We discovered that Cheung also performed audit work for Kingold. In a 2010 comment letter, Kingold assured the SEC of its compliance with U.S. GAAP and named Cheung as helping implement Kingold’s financial reporting system:

Source: 2010 SEC Comment Letter

Kingold’s financial statements include “clean” audit opinions signed by Friedman LLP, a firm that has earned millions from auditing a variety of discredited and/or fraudulent US-listed Chinese companies such as: Advanced Battery Technologies (here), China Natural Gas (here), and SinoCoking Coal (here). Our research indicates that Friedman’s audits of Kingold have also failed.

Kingold’s Business Claims Defy Logic

The business model Kingold presents to investors is very simple. The company manufacturers gold jewelry out of a single high-tech factory in Wuhan and the product is then sold to distributors and retailers. Revenues come from a combination of what KGJI calls “branded” production (in which Kingold crafts gold into jewelry) and “customized” work (in which the customer supplies the gold and Kingold charges a fee to refurbish it).

(“High Tech” workshops in Kingold’s sole Wuhan factory. Source: Kingold Chinese Promotional Video. Note: The above photo captures a worker hand-crafting Jade, a product that Kingold has falsely denied having any involvement with.)

Importantly, Kingold’s business clearly requires hand-craftsmanship that limits its scalability. Kingold itself admitted this in its Chinese prospectus issued as part of the company’s failed IPO attempt. In that document, Kingold stated that its then-current annual production capacity was 8 metric tons of gold and that it would need to have 500 total employees to increase that production to 20 metric tons.

Source: Internal Analysis. Data from Kingold SEC Filings.

Since that time, Kingold’s reported revenues have grown by 10x from $109 million in 2008 to over $1 billion dollars annually. The company’s claimed gold manufacturing volumes have surged from 14 metric tons to 60 tons. In the most recent quarter alone, Kingold claims to have sold over 20 tons of gold jewelry– an amount greater than the entirety of the company’s stated 2010 annual capacity.

This means that, magically, Kingold has tripled its capacity and grown its revenues by over $750 million USD by adding only 68 employees since 2009.

2008-2015 Cumulative 2008 2009 2010 2011 2012 2013 2014 2015
Additions to PP&E $1.2M $483k $29k $31k $368k $150k $78k $19k $67k
Total # of Employees <500 500 507 661 620 532 550 568

Source: Kingold SEC Filings. Additions to Plant Property & Equipment (“PP&E”) as disclosed in Kingold’s Cash Flows from Investing activities.

Kingold’s SEC filings attribute the company’s manufacturing success to “continuous improvement of our technology.” However, Since 2008, Kingold has spent a mere $1.2 million in cumulative additions to PP&E. During the entirety of 2015, Kingold invested a total of only $67 thousand dollars in PP&E (to support over $1 billion of claimed revenues). This disproportionate lack of investment (along with Kingold’s own Chinese promotional video) completely undermines the promoted notion that Kingold possesses state of the art manufacturing technology.

In short, Kingold’s believers must explain how a manufacturing business can experience exponential production growth without any meaningful incremental inputs of either labor or capital. We see two possibilities; either Kingold is a communist manufacturing miracle, or the company has fabricated its SEC filings.

Chinese Documents Demonstrate That Kingold’s SEC Filings Are Fabricated

The previously cited Today’s Fortune article explained that after obtaining a U.S. listing, the fraud school:

will talk to the long-term cooperating accounting/auditing firms to make sure that the fake financials pass through the auditing process smoothly, and that perfect audit reports will be issued for those companies. They will make sure those auditor reports seem very reliable.

We obtained older documents that Kingold publicly filed with the Chinese State Administration of Industry and Commerce (“SAIC”) and contain financials through 2012. (Note: Afterwards, many companies were no longer required to report financial information to the SAIC on a go-forward basis.)

In the SAIC filings, pre-tax profits are a mere 20-30% of the totals Kingold has reported to the SEC. The documents also reveal that Kingold understated its liabilities in SEC reports by a factor of as much as 10x while vastly overstating its book value.

Source: Kingold SAIC Filings. Internal Translation & Analysis. Numbers should be considered approximated due to currency conversion.

This is not the first time that the integrity of Kingold’s SEC filings has been called into question. In 2011, a Seeking Alpha author discovered that:

  1. Chinese State Administration of Taxation (“SAT”) filings showed that Kingold’s reported revenues and profits amounted to only 29% and 14% of what the company respectively reported to the SEC.
  2. One of Kingold’s large Chinese shareholders was offering to sell its shares at a much lower price than NASDAQ market prices. The shareholder’s listing included Kingold financials (audited by a firm named Wuhan Tianli) that reported substantially lower revenue and net income totals than Kingold reported to the SEC.

In a subsequent open letter to shareholders, Kingold’s Chairman, Jia Zhihong, declared that Wuhan Tianli (the auditor of the financials in question) had never performed audit work for Kingold. The Chairman stated that:

Tianli has never been Kingold’s auditor in the PRC, or anywhere else, nor have they ever had access to our books or records. The idea that Tianli performed an audit of Kingold without the Company’s knowledge and without visiting or contacting me or the Company is impossible and absurd.”

The Chairman’s statement to Kingold’s shareholders is false. SAIC documents filed by Kingold specifically name Wuhan Tianli as a Kingold auditor and even include the national photo ID cards of the Wuhan Tianli auditors that performed the work. This finding, in our opinion, acts to completely undermine the Chairman’s credibility as well as the integrity of the company’s public statements to investors.

Source: Kingold’s SAIC filings. Brief redactions have been made due to privacy concerns.

In light of these previous discoveries and the Chairman’s influence in Wuhan (Chairman Zhihong is a former military official), we anticipated that Kingold’s more recent chinese filings would match the SEC numbers. We obtained tax filings that Kingold made with the SAT from 2013-2015 and, as expected, reported revenues and profits closely followed Kingold’s SEC financials.

However, in our opinion, both the SEC & SAT financials display significant irregularities. Although Kingold sells its product to distributors and retailers, Kingold reports having de-minimus accounts receivable (The 2014 SAT filings, for example, imply a stratospheric Receivables Turnover Ratio of 2,200 times). Even if we were to take the company at its word that it operates in an entirely cash business, the financials show that very little cash accumulates and that inventory turns over slowly–a combination we find highly suspect.

Similar to the older SAIC filings, Kingold’s SAT filings also report significantly higher liabilities (and lower book values) than what the company reports to the SEC.

2013 SAT 2013 SEC 2014 SAT 2014 SEC 2015 SAT 2015 SEC
Assets Total 353.8 301.1 404.3 311.75 519.3 469.9
Liabilities Total 209.8 86.2 218.2 53.5 303.4 203.9
Owner Equity Total 144.1 214.9 186.1 258.2 215.9 265.6

Source: Kingold’s Chinese SAT Filings and U.S. SEC Filings.

We have no idea how many sets of books Kingold keeps or what the “correct” numbers are, but we think it is obvious the company is dramatically smaller than its SEC filings claim. Even worse, we have become concerned that undisclosed transactions have impaired or even eliminated shareholder’s equity.

Undisclosed Related Party Transactions Indicate That Shareholder’s Capital Has Been Misappropriated.

Three Kingold-affiliated individuals are involved in undisclosed related party dealings and have overlapping business interests with one another:

  • Jia Zhihong (贾志宏) : Is the co-founder of Kingold and the current Chairman. Although Chairman Zhihong has told shareholders he doesn’t have any other businesses, we discovered that the Chairman is involved in many other companies including Wuhan Kangbo Biological Technology Co. Ltd (“Kangbo”).
  • Chen Wei (陈炜) : A longtime shareholder of Kingold and is listed in documents as being the equivalent of Kingold’s head of R&D at some point. He is the legal representative and majority shareholder of Wuhan Lianfuda (which Kingold has falsely depicted as an “unrelated party”).
  • Hu Qiao (胡乔): Is entrusted as the legal representative for KGJI’s Wholly Foreign-Owned Enterprise (“WFOE”) (See here for a background on the VIE structure and the importance of the WFOE for western shareholders). Hu Qiao is also the legal representative for Kangbo and several other companies with overlapping interests.

Kingold’s SEC reported liabilities (primarily consisting of byzantine layers of debt) have exploded from $204 million at the end of 2015 to over $1.3 Billion as of September 30, 2016. Kingold’s SEC filings state that this debt has been used to finance purchases of Gold, causing promoters to argue that KGJI shares are “one of the cheapest ways to own gold in the world.”

KGJI Total Liabilities (Quarterly) data by YCharts

The company has told investors that it is purchasing gold in anticipation of looming jewelry demand from the long-awaited completion of its Jewelry Park (its first direct retail location). Based on our investigator’s visit to the construction site, we find it farcical to believe that Kingold will sell anything remotely close to $1 Billion USD of gold from this single location in Wuhan.

We obtained a Kingold credit report provided by The Peoples Bank Of China (“PBOC”) and those documents tell a far different story:

Source: Capture of PBOC Credit report above with amounts listed in units of 10,000 RMB. Below section includes our translation of the table and conversion into absolute amounts in both RMB and USD.

The PBOC documents reveal that Kingold has made $1.5 Billion RMB (roughly $225 million USD) worth of undisclosed guarantees and asset pledges primarily for the financial benefit of related party companies.This amount exceeds the entirety of the 2015 shareholders equity that Kingold reported to the Chinese SAT.

Roughly $150 million USD of this total consists of assets Kingold has pledged (presumably gold) for the benefit of Wuhan Kangbo Biological. Shockingly, Chinese SAIC documents filed by Kangbo irrefutably demonstrate that Chairman Zhihong has had substantial involvement in Kangbo and even co-founded the company (through his interest in Hubei Zhicheng Biological). Furthermore, Kangbo’s current Legal Representative is Hu Qiao, the very individual responsible for safeguarding Kingold shareholder’s WFOE.

Source: Wuhan Kangbo Biological’s SAIC filings. Brief redactions have been made due to privacy concerns.

Kingold has engaged in other undisclosed related party transactions. In July, the company announced the sale of its Jewelry Park to what Kingold’s SEC filings called “an unrelated party” named Wuhan Lianfuda Investment Management Co., Ltd (“Lianfuda”). Once again, Kingold’s statement to investors is false.

We obtained documents that Lianfuda filed with the chinese SAIC that name Lianfuda’s Chairman as Chen Wei, a longtime shareholder of Kingold. We also learned that Kingold and Lianfuda share the same registered address: Te 15 Huangpu Technology Park, Jiang’an District, Wuhan City (but a visit by our investigators found that this address does not exist).

Source: Wuhan Lianfuda’s SAIC filings. Brief redactions have been made due to privacy concerns.

The financial nexus between Kingold, Lianfuda, Kangbo, and other affiliates of the Chairman has become highly relevant for Kingold’s shareholders.

We are concerned by recent Chinese media reports of Kingold having potential involvement in the Shanghai stock market trading activities of related parties.

Several weeks ago, the Chinese media wrote articles (here and here) about trading irregularities in a Shanghai-listed company named Wuchang Fish (600275.SH). The articles stated that Chinese regulators discovered that Lianfuda had acted in concert with affiliates to accumulate a sizeable position as part of a potential attempt to gain control of the company. The media also reported that Lianfuda does not have enough registered capital to support such a transaction leading to speculation that others were “behind the scenes”.

That speculation has centered specifically on the potential involvement of Kingold Jewelry and Chairman Zhihong as the undisclosed financial source of the transactions. Our English translation of one of the media articles (which we have made available here) states that:

a NASDAQ listed company Wuhan Kingold Jewelry Co Ltd (KGJI.NASDAQ) may also involve into this [the trading of Wuchang Fish]the key is the Chinese concept stock Kingold Jewelry and Jia Zhihong and Chen Wei behind the scene

Chinese media reports indicate that there continue to be far more questions than answers. However, it is clear that an elaborate web of interconnectivity exists between Chairman Zhihong and individuals involved with Kingold on one end, and entities associated in the trading of Wuchang Fish on the other.

While a detailed exploration of these complex entanglements is beyond the scope of this report, we are not comforted by Kingold’s abrupt decision to cancel its customary U.S. quarterly earnings call just weeks after the media reports first emerged. We also find it troubling that Kingold now appears poised to attempt another U.S. capital raise despite having discussed a potential stock buyback earlier this year.

We encourage investors to conduct their own due diligence into these factors before sending additional millions overseas.

Disclosure: I am/we are short KGJI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I am/we are short KGJI.