It was April 2011, and Wall Street had its eyes on China. A flurry of Chinese companies had listed on U.S. exchanges in the previous years, with investors cheering them on and snapping up shares. But some of the companies were starting to have serious problems. The U.S. Securities and Exchange Commission (SEC) had revoked several Chinese listings. Troubled firms were typically smaller Chinese companies; many of them had used auditors whose names were not well-known in the U.S. In some cases, company auditors resigned.
Amid the uncertainty, some investors decided to place bets. They took a close look at the statements issued by many Chinese companies to evaluate the quality of their earnings. If they could tell the difference between strong firms and suspect firms, they could find investment opportunities, particularly to go short, or bet against, the troubled companies. Longtop Financial Technologies had listed in the U.S. in 2007 in a hugely successful IPO (LFT), had a brand-name auditor and counted major U.S. financial firms among its investors.