The Director Of ‘The China Hustle’ On The Reverse-Merger Scandal, The Biggest Con Since The Mortgage Crisis

04.04.18 6 months ago 3 Comments

Magnolia Pictures

(China Hustle protagonist Dan David)

Like a lot of white-collar crime, the fraud depicted in The China Hustle, a new documentary directed by Jed Rothstein and produced by Alex Gibney, is outwardly complex, but the basic act is simple. Rothstein’s film investigates the world of the “reverse-merger,” a type of financial fraud that became big business in the wake of the financial crisis, when investors were looking to Chinese companies to become the next bull market. The trick was to merge a Chinese company with a defunct American one that was already listed, which could then be brought to the market without the usual audits that accompany an IPO (initial public offering).

That’s the outwardly complex part. The simple part was that once the companies were listed, they essentially just invented wildly inflated growth and earnings numbers, and collected money from investors eager to get in on the action. Done correctly, everyone on the inside could get their bonuses before the bottom dropped out, extracting money from anyone still holding the paper when the truth came out. It was often so simple that, as some of the people profiled in The China Hustle discovered, all one had to do to discover it was to compare the numbers in the companies’ Chinese filings, in which they risked jail time and worse for lying, and thus told the truth, to their American filings, in which they could lie without consequence, which they inflated accordingly. It was a multi-billion dollar fraud enabled by the simple failure of two agencies to share numbers (among other things).

It was a simple act — not much different than a pump-and-dump, a Ponzi scheme, a confidence game, you name it — but it took the coordination of a number of different parties to make it work, knowingly or not; American banks to promote the filings, stock promoters to recommend them, regulators to rubber stamp their approvals, and celebrity promoters to give them a sheen of legitimacy. One of the more odd and telling aspects of The China Hustle is its depiction of the “celebrity investor” hustle, where big names in government and the military lend their names to investment banks, giving the investments a sheen of legitimacy despite no one truly expecting a former general or a secretary of state to know anything about Chinese paper companies or coal refineries. Somehow familiar faces short-circuit our brains’ normal logic processes. In the movie’s chosen case, it happened to be ex-NATO commander and former presidential candidate Wesley Clark, who acted as chairman of an investment bank pushing reverse-merger companies, Rodman and Renshaw, most of which turned out to be worthless

Much as in The Big Short, Rothstein sweetens the bitter pill of our financial system being easily gamed and built on lies by focusing on the people trying to expose the truth, the short sellers trying to tank the bad investments, misfits despised by their peers for trying to ruin the party (at one point there’s stock footage of ex-Lehman Brothers scumbag Dick Fuld telling a conference he’d like to rip out short sellers’ hearts and eat them) but who are ultimately doing the right thing. Thus it becomes a hero’s journey built on a tragedy rather than a simple tragedy.

Rothstein also walks a delicate line in The China Hustle. With Donald Trump in the midst of starting a trade war with China, and who spent much of his time on the campaign trail blaming China for all of the US’s economic woes, it would be easy for a documentary that focuses on a fraud with a specifically-Chinese bent to get lumped in with the same kind of easy xenophobia. But as with the Russian collusion investigation, it isn’t really about China or Russia as a specific enemy, they’re both just iterations of a larger problem: global capital. Corporate capital will always exploit regulatory loopholes and play national differences for its advantage because that is its only function: to grow.

Thus The China Hustle raises some more existential questions, like isn’t the entire market essentially a confidence game? And if so can we still harvest some of its benefits without creating a class of losers? With The China Hustle now playing in select theaters and expanding to more this weekend, I got to pick director Jed Rothstein’s brain about it over the phone.

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