21Vianet Group Inc (NASDAQ:VNET) has seen a lot of action these couple of days, and now we know why. On Tuesday, ValueWalk received tips from two trusted sources that someone was about to release a short thesis on the company. Now we have that report in hand, and it comes from a firm called Trinity Research Group.

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Tug o’ war with 21Vianet Group stock

Our sources tell us that 21Vianet Group stock spiked earlier today due to some big-time options activity. Because of that action, many investors probably assumed that prominent short-selling firm Muddy Waters was about to release a short thesis on the company, as shares of WBAI did eas shares of WBAI did today. Shares slid by as much as 20%.

[drizzle]Then when Trinity released its report today, investors realized that it wasn’t coming from Muddy Waters, so short-sellers—most likely Muddy Waters fans—probably moved to cover their positions. 21Vianet Group spiked by 15% because when Carson Block’s firm targets a company, its stock usually is negatively impacted, but the fact that the report comes from a relatively unknown firm worried investors less—until, that is, they had a closer look at the report.

21Vianet Group accused of fabricating results

Trinity alleges (after conducting a six-month investigation) that 21Vianet Group is guilty of both accounting and securities fraud. The firm believes that the NASDAQ will eventually delist the company and that it has been reporting “fraudulent financials and operating metrics” since its initial public offering in 2011.

The report also states that in the firm’s estimates, the company has fabricated at least 31% of its total revenue and all of its EBITDA, leaving an incremental one-third of its total revenue “illicitly derived and therefore worthless.” (All charts and graphs in this article are courtesy Trinity Research Group.)

21Vianet

21Vianet accused of being a Ponzi scheme

In addition, Trinity calls 21Vianet Groupa “Ponzi scheme” and says that it “overstates cabinet growth and utilization” in its core Internet Data Center hosting business. The firm states that the segment burns through 27% of the company’s “overstated” revenue because it keeps doing construction.

And then to make up from the alleged shortfall in that segment, Trinity claims that 21Vianet “fabricates revenue and profits by acquiring tangential businesses that do not consume cash.” The firm alleges that this practice is a sort of rinse and repeat cycle at 21Vianet .

21Vianet Modus operandi

21Vianet Group rated a zero

According to Trinity, 21Vianet Group is “overleveraged,” “hemorrhages cash” and “technically insolvent.” The firm claims that if even part of its findings end up being confirmed by debt holders or auditors, the company will be officially violating its debt covenants. And if debt holders suddenly demand their money, the report states that there would be a liquidation that brings 21Vianet Group shares down to zero.

21Vianet funds acquisition

VNET cash Flow

21Vianet Group a serial acquirer

The firm also alleges that the companies 21Vianet Group has acquired have “mostly ghost offices, no visible assets or operations of any kind and a litany of red flags in the local filings.” For example, Trinity’s report states that iJoy, one of 21Vianet Group’s subsidiaries, “is a complete fraud that exists only to roundtrip cash” into Vianet.

In addition, the report states that the company’s Managed Network Services segment, which makes up another third of its total revenues, is only “a front for China’s largest illegal bandwidth reselling operation that was blacklisted by state-owned China Telecom after investigation.” The firm includes internal documents from China Telecom that its researchers obtained. Trinity also alleges that the segment is still operating illegally.

Trinity researchers believe that 21Vianet Group’s “Ponzi scheme” is beginning to get out of control after the company’s two biggest acquisitions earlier this year. One of those acquisitions, iPoo, cost 21Vianet a 2,000% premium, according to Trinity, even though it didn’t even gain regulatory approval for a China listing and was banned in some Chinese cities. The firm states that in both of this year’s acquisitions, 21Vianet had to go “all in” in order to keep the scheme going.

Trinity also provided a summary of what it claims has happened to the companies 21Vianet has acquired through the years

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VNET value destruction

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