6.20.2012

Distressed Debt: CMEDY and Cayman Insolvency

I am short CMEDY stock.

I will be honest: This is one of the weirdest situations I have ever been involved in. But instead of offering opinions or commentary on my thinking behind my position, I want to lay out facts related to the case and hopefully bring a little clarity to the situation.

Fact #1
CMEDY has two convertible notes outstanding: 6.25% of 2016 and 4% of 2013.  CUSIPs are 169483AE4 and 169483AC8 respectively. They are in default due to missed coupons.


Here are two dealer runs from the last few days, the first from Barclays and the second from DB (I've removed my sales coverage information):






As you can see, both converts are trading at distressed levels.


Fact #2
On June 15th, a wind-up petition against China Medical Technologies was filed in the Cayman Islands. I have uploaded the relevant documents. In one of the filings, this is written:
"The Company has failed and refused to communicate with the Petitioner with respect to the events of default or the amounts now due and owing under the Notes. As noted above, the Company failed to respond to the Petitioner’s notices of defaults and of acceleration. The Petitioner sent a copy of the 2 March Notice to the Company's counsel as identified in the 6.25% lndenture, in response to which the Petitioner received a letter advising that such counsel no longer represented the Company in any matters. Additionally, the Company and its counsel did not respond to email communications from counsel to the Petitioner. 
Petitioner is advised that counsel to the 6.25% Noteho√¨ders and the 4% Noteholders (together, the ”Noteholders”) has been unsuccessful in its efforts to engage with the Company regarding the events of default.
Relevant Documents:


Winding-Up Petition - Sealed                                                                                            


and

First Affidavit of Steve Cimalore - Sealed                                                                                            

Fact #3
CMEDY stock has been on a tear in the last week. Here is the YTD chart.


The movement has been driven from from a 13D filed by AER Advisors, Inc ("AER"). which listed that along Peter Deutsch and William Deutsch, wine magnates, they owned 36.95% of the company. That filing was amended today to note that the group now owns 42.01% of the company. I will note that in neither filings was a detailed transaction history listed.

On May 7th, 2012, AER Advisors filed a 13G/A, that did not include the Deutsch's, but did list that they owned 6,833,873 shares. The 13D filed last week (June 12th) noted AER owned 11,923,452 shares.

From May 7th to June 11th (the time in which AER could have acquired shares in the open market between the respective filings), here is the volume trading history of CMEDY:


The total shares traded in this time is 5,767,094. The change in AER/Deutsch ownership is 5,089,579. If there were no insider transactions (i.e. AER/Deutsch buying directly from management), they would have represented 88.2% of the volume of the stock in this period.

Fact #4
AER Advisors, Inc SEC FORM ADV can be found here: AER Advisors, Inc Form ADV. Their adviser brochure can be found here: AER Advisors Brochure

On Schedule A of their ADV, a Thomas Joseph Steffanci is listed as a 5%-10% owner of AER (Director/Shareholder) class. His biography can be found here: Thomas Steffanci biography and his LinkedIn page here: Thomas Steffanci LinkedIn

When I do a search on Bloomberg for Tom Steffanci here is what comes up:


Tom Steffanci is also the name of the President of W.J. Deutsch & Sons, Ltd, owned by William and Peter Deutsch, who, if you remember, was party to the AER 13D filed above. 

They are obviously different people. From some sleuthing, I believe they are father and son.

Now, I do not know if this actually means anything. I just wanted to point it out to people that may not have caught it.

Fact #5
CMEDY is party to an class action complain, stemming from claims of fraudulent disclosures. You can find the docket here for those that have Pacer. 



12 comments:

John 6/21/2012  

I think you are aware of this from John Hempton:

http://brontecapital.blogspot.com.au/2012/05/stock-called-comedy-joke-is-on-someone_09.html

Anonymous,  6/21/2012  

This is fucked up all right, I'm out if they can take it to $6 they can take it to $12.

Only theory I had, is the bond holders are manipulating the sp higher so they can convert and sell. But there is not the liquidity too sell into.

Hunter 6/21/2012  

John - You need to write another post on this. Smells of manipulation.

Anonymous,  6/21/2012  

Its a complete fraud, but there's no borrow

Kid 6/21/2012  

Good luck finding the shares and not having to repurchase them when it hurts. Tough one Hunter.

AIGswap,  6/22/2012  

Yeah this one is just brutal. I've never seen anything like it...

Pcook,  6/22/2012  

Can someone recommend a good reference user-friendly-ish book on Distressed investing (think Margin of Saftey for distressed debt). It seems like there are so many terms to know, and i hope there is a text out there that can guide me through the jungle.

Thank!

Anonymous,  6/22/2012  

http://www.amazon.com/Distressed-Debt-Analysis-Strategies-Speculative/dp/1932159185

jj,  6/22/2012  

are they allowed to buy and buy and buy .... ???

Anonymous,  6/22/2012  

this is simply unreal. never seen anything like it. anyone have any explanation as to this relentless rally other than manipulation, which even that doesn't make sense as Im not sure who would benefit from that?

Anonymous,  6/24/2012  

Are you stating that the Steffancis are father and son or the Deutsches or both?

Anonymous,  6/29/2012  

The Securities and Exchange Commission ("Commission") announced the temporary suspension, pursuant to Section 12(k) of the Securities Exchange Act of 1934 (the "Exchange Act"), of trading in the securities of China Medical Technologies, Inc. ("China Medical"), of the People's Republic of China, at 9:30 a.m. on June 29, 2012, and terminating at 11:59 p.m. on July 13, 2012.

The Commission temporarily suspended trading in the securities of China Medical because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the status of the company's officers and directors, the accuracy of the company's financial statements and filings with the Commission, and the current financial condition of the company.

The Commission cautions brokers, dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.

Further, brokers and dealers should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule. If any broker or dealer has any questions as to whether or not he has complied with the rule, he should not enter any quotation but immediately contact the staff in the Division of Trading and Markets, Office of Interpretation and Guidance, at (202) 551-5777. If any broker or dealer is uncertain as to what is required by Rule 15c2-11, he should refrain from entering quotations relating to China Medical securities until such time as he has familiarized himself with the rule and is certain that all of its provisions have been met. If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action.

If any broker, dealer or other person has any information which may relate to this matter, he should contact Michael S. Dicke or Tracy L. Davis of the San Francisco Regional Office of the Securities and Exchange Commission at (415) 705-2500.


denis

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.