Best fraud story of the year?

Look at any list of hot stocks and you’ll see what gets most investors excited: rapid growth, China, anything that can be described as ‘tech.’ When you talk about the importance of good corporate governance, it feels like yelling into the wind. Take for example the Alibaba Group Holding Ltd (NYSE:BABA) IPO, which looks like a great company with incredible prospects. The IPO was a smash success and the stock price has been rising since then, despite some serious corporate governance risks.

But if you’re interested in hearing the worst case scenario, look no further than Ultrasonic AG (ETR:US5) (FRA:US5), the holding company that (much like Alibaba Group Holding Ltd (NYSE:BABA)) owns a number of Chinese clothing manufacturers through a Hong Kong intermediary.

ultrasonic structure

Ultrasonic borrows $60 million ahead of a shake-up at the top

The story starts in August when Ultrasonic AG (ETR:US5) (FRA:US5) announced that it was opening a $60 million credit facility to speed up growth through acquisitions because organic growth had been disappointing. That’s already not terribly promising for long term investors, but the market hardly reacted.

Then in September Ultrasonic AG (ETR:US5) (FRA:US5) COO Minghong Wu informed the board that he would take six months’ leave for medical reasons and CEO Qinyong Wu (his father) would fulfill both roles until his return. The company also revealed in the same announcement that CFO Chi Kwong Clifford Chan had decided to step down to spend more time with his family in Hong Kong. A high level change while the board is operating without a COO could be rocky, but again there’s nothing necessarily wrong.

Father-son execs take the money and run

Four days letter, Ultrasonic posted this gem, dropping its stock price from €6.5 to €1.7 in a day.

“Chi Kwong Clifford Chan, CFO of Ultrasonic AG, informed the Supervisory Board that since the weekend he has been unable to reach both the company’s CEO, Qingyong Wu, and the company’s COO, Minghong Wu. Inquiries initiated thereupon, revealed that both, CEO and COO, apparently left their homes and are not traceable. Moreover, Mr. Chan was informed by the accounting department that most of the company’s cash funds at PRC and Hong Kong levels have been transferred being no longer in the company’s range of influence.”

Two days later Nomura was demanding the entire $60 million credit facility and an additional $180,000 interest be repaid immediately, and the CFO’s retirement plans were put on hold while he tried to ‘clarify’ the situation. The Supervisory Board formally dismissed the father-son duo that had run off with the $60 million, for what it’s worth. At some point former Ultrasonic AG (ETR:US5) (FRA:US5) CEO Wu approached the company and denied the allegations to the media, but he still hasn’t actually resurfaced.

At the end of last month Ultrasonic AG (ETR:US5) (FRA:US5) CFO Chan finally got to step down, concluding that there was nothing more to be done. Investors who have held on this long probably feel the same way.