Update on Orient Paper

By Eric Jackson
RealMoney Contributor
7/8/2010 3:15 PM EDT
Click here for more stories by Eric Jackson

I wanted to provide an update on the further research and due diligence I've been doing intoOrient Paper (ONP - commentary - Trade Now) over the last week.

Three weeks ago, few investors had heard of this stock. On some trading days, ONP traded only 20,000 shares.

Yet, last week, a newly created website for a company called Muddy Waters published its first-ever report, suggesting that ONP was a fraud. Last Thursday, the stock lost 38% of its value in the first hour of trading. A couple of readers sent me emails describing how their brokers sold all ONP stock on Thursday, because they were purchased on margin. This accelerated the rapid price drop.

However, on Friday, 6 million shares were traded and the stock gained over 50% after a number of articles (including one by Rick Pearson and one by me, both published on TheStreet) questioning the validity of Muddy Waters' claims.

On Tuesday morning this week, ONP released a comprehensive press release, rebutting the vast majority of Muddy Waters' allegations. The response was far-reaching and detailed. Since then, Muddy Waters' website(the company published its last comment on Tuesday, ahead of the ONP release), which had been giving daily updates since it first lobbed its accusations against ONP, has been silent.

I, along with several colleagues in China, have been heavily researching ONP and the Muddy Waters allegations since they first broke last week. Although we were surprised and found that the original allegations did not jibe with our prior research on the company (which is why I bought ONP several months ago and have discussed openly why I like the company), we wouldn't be responsible investors if we didn't thoroughly examine all criticisms leveled at any of our long investments. In China especially, most Western investors have deep-seated fears of fraud going on at their expense. Even though we questioned the credibility of the people making the claims, we had to treat the allegations seriously.

ONP's new corrugating line at Qinyang No. 1
Source: Ironfire Capital

Another view of ONP's new corrugating line
Source: Ironfire Capital

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