WHO IS RINO ?

• RINO is a Chinese environmental technology company whose majors are

designing, manufacturing, installing and servicing waste water treatment and
exhaust emission equipment.

• The objective of this case is to allow a discussion of issues such as the method
used by Chinese companies to list on stock exchanges in the US using reverse
mergers, the risks associated with complex corporate structures that are used
to facilitate such listings, and corporate governance and accounting issues in
Chinese companies listing in the US through reverse mergers.
 WHAT IS A REVERSE MERGER ?

• A reverse takeover (RTO) is a type of merger that private companies

engage in to become publicly traded without resorting to an initial public
offering (IPO). Initially, the private company buys enough shares to control
a publicly traded company. The private company's shareholder then
exchanges its shares in the private company for shares in the public
company. At this point, the private company has effectively become a
publicly traded company.
 WHAT HAPPENED WITH RINO ?

In 2006
Zou Dejun, the CEO of Dalian The Shares of RINO
RINO Environment International
Engineering Science and Jade Mountain Corporation
Technology Co. Ltd(Dalian changed its name to
RINO), found a Nevada-based 100% shares of
RINO International RINO International
shell company, Jade Mountain Corporation.
Corporation, that was listed Corporation were
on the Over-the-Counter hold by Zou and his
Bulletin Board (OTCBB) but wife Qiu.
which was largely inactive.
 OTCBB

It is not part of any major exchanges.

This is primarily because OTCBB stocks are not generally notable in size and
are known for instability and considerable risk.
Because of this, a select few OTCBB stocks successfully move from the OTC
market to NASDAQ or some other major exchange because they fail to meet
the listing requirements.
 THE PROFITS OF RINO INTERNATIONAL
CORPORATION

Its only source of operating profits is through a contractual arrangement with

the China-incorporated company Dalian RINO, which dictated that 100% of
Dalian RINO’s profits was to be channeled into Innomind’s wholly-owned
subsidiary.
 Zou – The Man
 Dejun David Zou was a person who built his way up from being a local
mechanic to being the CEO of Dalian RINO
 The scope of the field and his promising progress in environmental
engineering ventures made him a rising star in his home country.
 At first, he started with Dalian Yingkun Energy & Environment Engineering
in the waste water treatment field which expanded along different
product lines basically leading to the founding of RINO.
 RINO International Corporation designs, manufactures, installs and
services proprietary and patented wastewater treatment, desulphurization
equipment, and high temperature anti-oxidation systems for iron and steel
manufacturers
 Zou and his wife Qui were the CEO & Chairman of the board respectively
dividing their time between China & LA managing RINO
 Non Independent
Board Of Directors Directors:
Jianping Qui
Dejun Zou

Independent
Directors :
Xie Quan
Kennith Johnson
Zhang Weiguo

Although there was

expertise prevalent
among the
independent
directors, the lack
of industry
experience
probably was the
reason the fallout
on account of
overspending by
Zou & Qui could
 BOARD COMMITTEES
• Boards committees were made up of :Johnson, Zhang
and Professor Quan.
• It fulfilled NASDAQ’S requirement of having at least 3
independent directors on the audit committee.
• Johnson was the chairman of the audit committee
• Zhang was the chairman of nominations committee
• Professor Quan was the member of the compensation
committee.
 DIRECTOR COMPENSATION
• The independent directors were each paid cash retainers of US$2,000
per quarter and US$500 for each board or committee meeting
attended.
• Johnson received 2,000 shares in 2009 for his role as chairman of the
audit committee.
• The non-independent directors did not receive director fees or
benefits.
• 2009 annual report reported that the fees paid to both Zhang and
Professor Quan’s to be only US$8,000.
 CFO TURNOVER

RINO had three different Chief Financial Officers

(CFO) in three years:

Bruce Carlton
Qiu from October
Richardson Ben Wang from
2008 to April
October 2007 to May 2010.
2010
September 2008
 Trouble Looms In Muddy Waters

On 10 November 2010, Muddy Waters, a short-seller, issued a report questioning

Rino’s financial situation

The allegations were :

- Accounting Irregularities In Rino’s 2009 Revenues

- In the US (US$193 Million) and its Results In Its Chinese Regulatory Filings (US$11
Million).

- None of this income was transferred from Dalian Rino to Rino.

- Capital raised by Rino was diverted to fund Dalian Rino’s China operations.

- 6 major flue gas desulphurization (FGD) contracts, of which 2 were non-existent

and the remaining 4 had issues.

- Rino did not report any tangible assets being a manufacturing firm.

- Rino reported zero tax in China.

What is Short Selling

Short selling is the sale of a security that the seller has borrowed. 

• A short seller profits if a security's price declines. 

• In other words, the trader sells to open the position and expects to buy it back later at a lower price and 
will keep the difference as a gain. 
Questions About the Auditor’s Role 

The discovery of these irregularities by a short­seller firm, instead of an audit firm, begs the question as 
to the competency of RINO’s auditor. 

• Frazer Frost is a relatively small firm and did not have local operations or an office in China. 

• Employees travelled to China from their California headquarters to perform audits, which cast 
doubts on their capability in performing audits effectively.

•  The audit partner, Susan Woo, did not have significant experience in auditing listed companies in 
the US, much less overseas­based companies. 

•  Almost all of Frazer Frost’s listed clients were China­based companies.
The Fallout
 One day after the release of the Muddy Waters’ report:

• RINO stated that it had begun an internal reviews 

• RINO decided to postpone its Q3 2010  earnings conference call.

• RINO’s audit committee issued a statement declaring that it will conduct a thorough investigation. 

• After the allegations by Muddy Waters, RINO’s stock collapsed by 60 per cent from US$15.52 to 
US$6.07 over six days. 

• On 11 April 2011, SEC suspended RINO from trading . 
• The SEC alleged that Zou and Qiu diverted $3.5 million in company funds to buy a home in 
California, without telling investors.

• The SEC said Zou and Qiu agreed to pay $150,000 and $100,000, respectively, without admitting or 
denying the charges.

•  They also will be barred from serving as officers or directors of a public company for 10 years.
What Is an Earnings Conference Call?

• The earnings conference call is a way for companies to relay information to all interested parties, 
including institutional  and individual investors, as well as buy­ and sell­side analysts. 

• Conference calls allow companies to highlight successes during prosperous times and calm fears 
during adverse ones. 

• The most popular time for companies to conduct these calls is immediately following the release of 
financial results, typically at the end of each quarter. 

• These are known as quarterly earnings results conference calls.
 CLOSING THE LOOPHOLE
In the lieu of scandals involving many other Chinese reverse merger companies
the US Securities and Exchange Commission (SEC) tightened requirements for
listing through reverse mergers. The new rules required companies to:
1. Complete at least one year of “seasoning period” trading in either the US
over-the-counter market or on another US-regulated or foreign exchange.
2. Maintain a minimum closing stock price of US$4 (US$3 or US$2 in the case of
NYSE and Amex, depending on the listing standard) per share for 30 of the 60
days before the date that listing begins.
3. Timely file all required periodic financial reports with the SEC or other
regulatory authority, including at least one annual report containing audited
financial statements for a full fiscal year commencing after the filing of the above
information.
 CROSS BORDER ISSUES

The SEC and the China Securities Regulatory Committee (CSRC) had signed a
memorandum of understanding to improve cross-border cooperation and collaboration
in 1994.

Before the new rules the foreign countries need not submit the financial reports of
entities lodged in their home countries. Hence, RINO had needed to comply only with
the Sarbanes-Oxley Act, NASDAQ listing rules and other applicable corporate laws in
US.