(Originally published Dec. 13, 2011, in CBK’s email newsletter, “Week Review. Sign up on CBK’s home page.)
Beijing-based ChinaCast Education Corp. (Nasdaq: CAST) has released a second letter to its shareholders, in conjunction with its Dec. 21, 2011, Annual Meeting, recommending shareholders vote for all ChinaCast Education Corp. nominees for executive and director positions. The company issued a special letter to the shareholders also in early October.
The company has been under the scrutiny of research firm, OLP Global, which has issued approximately 7 notes on the company questioning its operations, hence putting CAST on the defense. So-called “research firm” Kerrisdale Capital Management jumped on the bandwagon in late November with its own report.
ChinaCast Education has twice postponed its annual meeting. Additionally, on Nov. 15, 2011, it announced that its Board of Directors had formed a special committee of independent directors to consider all strategic alternatives which would enhance shareholder value after receiving an unsolicited bid for the company made by a qualified institutional investor at a significant premium to the current market price of the company’s common stock. The special committee retained Paul, Weiss, Rifkind, Wharton & Garrison LLP to act as its independent legal counsel and Credit Suisse Securities (USA ) LLC to act as its financial advisor in connection with the Special Committee’s evaluation of strategic alternatives.
On March 16, 2011, ChinaCast announced a $50 share repurchase program. In mid-June the company reported it had repurchased approximately 915,503 shares of stock at an average price of $4.747 under its $50 million corporate share buyback plan. It has not issued an update since. Its 52-week-high was $7.85 in Dec. 2010; its low $2.27 in Oct. 2011. It closed on Dec. 12 at a respectable, given the circumstances, $5.43.
Of note, OLP Global’s cofounder, Adele Mao, stated in an email note to CBK, that her firm does not “short” the stocks of companies it covers. She wrote, “To set the record straight, OLP is not a `short selling’ firm. Neither OLP Global nor its officers and employees currently maintain or will maintain a financial interest in any company that is the subject of any OLP report.” The firm initiated coverage on CAST in Nov. 2009 and has released 20 reports on the company, a number of them standard “earnings re-caps.”
In February 11, 2011, OLP Global reported that it had received a cease-and-desist letter from Eugene Licker, Co-Chair of White Collar Criminal Defense and Investigations Practice Group at Loeb & Loeb LLP, CAST’s legal counsel, demanding the research firm “immediately cease and desist from making false and defamatory statements about ChinaCast and its affiliates.” Such a letter seems unwarranted if OLP is acting as a legitimate research firm. [Of interest, Loeb's Eugene Licker led the legal team in the dismissal of the shareholder lawsuit of China Century Dragon.]
That said, the tenor of much of the language OLP has used recently in its promotional headlines of its CAST reports–such as “Show me the money!” and “Biting Off More Than They Can Chew?”–undermines the firm’s own reputation as a serious research firm and is similar to that of the so-called “research firms” which are short-selling the stocks they supposedly “cover.” It would be easy for CAST and its counsel to believe OLP is doing the same and the jury is still out on whether those firms have cross legal lines.
Indeed over the past year OLP’s headlines promoting its coverage have drifted from generally professional to caustic and its coverage seems to now mimic that of the short-selling “research firms” appearing as some kind of “attack” on the company in question. In November, OLP release a damning report on New Oriental Education and Technology Group Inc. (NYSE: EDU) alleging the company overstated revenues. This came on the heels of EDU announcing a partnering with the esteemed educational publishing company McGraw-Hill. The company responded with a strongly-worded letter denying OLP’s claims and suggesting the research firm was intentionally trying to manipulate its stock price down.
