A Wall Street Scion's Expensive Education

Jesse Glickenhaus defends a losing investment in a mysterious Chinese fertilizer company

The Glickenhauses Chris Goodney/Bloomberg

By James Sterngold

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When Jesse Glickenhaus joined his family's New York asset-management company in October, he wanted to bring its stockpicking into the era of global warming. That's what led him to make a $4 million investment in China Agritech (CAGC), a Beijing-based producer of organic fertilizer listed on the Nasdaq Stock Market (NDAQ) and 22 percent-owned by Carlyle Group. It was, Glickenhaus says, a way to profit from the need to feed China in an environmentally responsible way.

Or so it seemed. The same week in November that Glickenhaus & Co., which has $1.3 billion under management, bought most of its shares—about a 2 percent stake in the company—China Agritech replaced its auditor. Three months later, investors who had bet against China Agritech's stock attacked the firm as a scam with no real operations. Shares tumbled to $6.88 on Mar. 14, when trading was halted for failure to file financial data, from $15.87 on Nov. 8, giving Glickenhaus & Co. a $1.8 million paper loss based on what it says was an average purchase price of $12.37. "It's not nothing, but it's not a big deal for us financially," says Glickenhaus, dressed in frayed khakis and a rumpled shirt, in the company's midtown Manhattan office. "The real reason we're fighting is because we believe someone blatantly lied to short the stock."

For Glickenhaus, 29, who has a master's degree in global affairs from New York University, it was a quick education in reverse mergers by foreign companies, such as the one executed by China Agritech in 2005. The experience has vexed his grandfather, Seth Glickenhaus, 97, who founded his first company in 1938 and still comes to the office most days. The elder Glickenhaus says he has "certainly never run into a problem like this."

In a reverse merger, a closely held corporation buys a publicly traded shell company and retains its U.S. listing. China Agritech came into being after China Tailong Holdings, a fertilizer maker, merged in 2005 with Basic Empire, a shell company that began life in Nevada in 1925 as Argyle Mining and no longer had any business operations, according to a China Agritech filing.

Companies that list on U.S. markets through reverse mergers aren't subject to the same scrutiny from regulators and investors as those that make initial public offerings, Luis A. Aguilar, a commissioner at the U.S. Securities and Exchange Commission, said in an Apr. 4 speech. More than 600 such "backdoor registrations" have been done since 2007, including about 150 by companies based in China, and a "growing number" of those "are proving to have significant accounting deficiencies," he said. Glickenhaus says he didn't check how China Agritech obtained its U.S. listing and focused instead on the fundamentals of the company.

The SEC has set up a task force to look for fraud in reverse-merger companies and began a probe last year asking auditors for information. China Agritech hasn't disclosed whether it's a target, and Shiwei Yin, an executive at Grayling, the company's investor-relations firm, declined to comment. John Nester, an SEC spokesman, says the agency neither confirms nor denies investigations.

On Feb. 3 a report titled "China Agritech: A Scam" was published on the website of Lucas McGee Research. The 16-page paper, whose authors were identified only as holders of short positions, or bets against the company, said China Agritech "has no valuable technology, intellectual property, customer relationships, or capital assets." Site visits to company facilities "found each one empty, idle and without production equipment," the paper said, with the exception of one plant in Beijing. Financial data supplied to Chinese regulators and obtained by "legal agents" who weren't identified showed that China Agritech had 2009 revenue of $7.6 million. While the company said it had almost $46 million of cash on its books and unaudited 2010 revenue of $119 million, the report concluded that revenue last year couldn't have exceeded $7.5 million. The report ricocheted on blogs and was cited by Bloomberg News. China Agritech shares fell 9 percent on Feb. 3.