The China Hustle Exposes a Local Tie to a Still-Unfolding Financial Threat

The China Hustle. Photo courtesy Magnolia Pictures

The China Hustle—an engrossing documentary that exposes, as Vanity Fair put it, “the biggest financial scandal you’ve never heard of”—begins with images of high rises and bustling downtowns against the conciliatory words of President Richard Nixon toward America’s then-enemy, the People’s Republic of China.

Great, I thought to myself while taking this in, right from the top, Orange County’s favorite disgraced son provided a local hook. Little did I know there would be a much stronger Newport Beach tie-in. (Besides an executive producer being legendary filmmaker and Newport Harbor High grad Frank Marshall. Other executive producers include Mark Cuban and Alex Gibney, director of Enron: The Smartest Guys In the Room.)

Director Jed Rothstein, who, like the Enron producers, has an Oscar nomination under his belt (for the 2010 documentary short Killing In the Name), establishes a pace that methodically explains the massive international scheme so that those of us who do not know a derivative from a dirigible can follow along.

We begin with those hair-pulling days after the 2007-08 market crash. Many investment professionals, who had lived large quarter after quarter, moped around as if they were extras on The Walking Dead set, but some scrambled for other investment opportunities.

This is something I did not remember because I was so fixated on what was going on in the U.S. at the time, but Chinese indexes back then were demonstrating explosive growth. That prompted money managers to look there as a place to park American clients’ money, but a huge obstacle stood in the way: U.S. investors were prohibited from investing directly into China’s market.

You and I would figure we were stymied and therefore open up a safe “savings plan” under our mattresses, but if there is one thing you can say about hardcore American capitalists, playing with other people’s money and racking up huge fees, it is that they will not rest until they find workarounds, kinda-sorta legitimate or otherwise.

What turned out to be perfectly legal—as crazy as it sounds—was for a Chinese company to take the place of a near-dead American company as a stock listing, rename it so as to not be associated with a known loser and appear as a new investment opportunity on the U.S. exchange. Which brings us to that strong local hook: One American company that convinced investors to go all in was Roth Capital Partners, whose headquarters remain in Newport Beach.

As one wag says in the film, “There was virtually no business in China you could lose money on.” To draw investors, Roth Capital Partners’ CEO, Byron Roth, threw lavish parties rivaling the Ibiza nightlife scene. DJs, exotic dancers, and stars such as Snoop Dogg and Billy Idol would perform. Another major seller singled out in The China Hustle was Rodman & Renshaw, whose chairman at the time was retired general and 2004 presidential candidate Wesley Clark, who hosted more somber meets-and-greets with the likes of Henry Kissinger.

The value of the Chinese companies, many of which hailed from the energy or agriculture sectors, was massive. At one point, 40 were said to have an aggregate value of $30 billion. It seemed that the investment community had found the golden hen that would lay high returns to make up for U.S. market meltdown losses—and then some.

The China Hustle brilliantly shows how it all unraveled. Suffice it to say there were shell companies on both sides of the world. It would not take a UC Irvine professor, Death by China author and Trump trade adviser such as Peter Navarro to cast China as the main evildoer. However, as Rothstein demonstrates, a special place in hell also must be reserved for the American bankers, lawyers and accountants who tried to stop the scheme from being exposed.

Then there are those, such as a former Roth Capital Partners seller of Chinese investments, who turned around and made a personal killing off the same via short selling, the phenomenon you may recall from the 2015 film The Big Short or, better yet, director Adam McKay’s source material, Michael Lewis’ 2010 book The Big Short: Inside the Doomsday Machine. Each showed how huge profits were made by investors who bet against the market, so they essentially profited off the worst financial freefall since the Great Depression.

Not all who made money off misery did so only to . . . well . . . make money off misery. Some were activists using what was then a little-known investment device to expose what was essentially fraud and cover-ups of the same, more as a warning to the moms and pops risking their life savings on what truly was too good to be true. My one qualm with the documentary is how briefly it dwells on this despair.

That just allows for more facetime with the picture’s main hero. Dan David made money off the Chinese investments, felt guilty after learning the truth about them, then dedicated his life to educating everyone else about them through his due-diligence firm Muddy Waters Research.

What is saddest about all of this is not only that it takes whistleblowers to expose hard truths, but also that so few in power can or will act. We hear of Securities and Exchange Commission (SEC) regulators that they are “outgunned like Keystone Cops chasing the Starship Enterprise.” Footage from a trip David made to Capitol Hill reveals the deaf ears in Congress, where the financial-services lobby rules.

Guess we’ll just have to wait for that next crisis before anything gets done. Angry hearings, no guilty CEOs imprisoned and minor reforms rolled back once no one is looking again. Rinse. Repeat.

The China Hustle was directed by Jed Rothstein for Magnolia Home Entertainment. Now available on Digital HD via Amazon Video, iTunes, Google Play, FandangoNOW and more.

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