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AAII Model Shadow Stock Portfolio: Emergency Sale of FAB Universal Corp. (FU)

FAB Universal Corp. (FU) is a digital media entertainment sales and distribution company, delivering media to its customers worldwide through intelligent kiosks, retail stores and franchises, and online through Apple iTunes and the Google Android Store. FAB’s intelligent media kiosk networks allow customers to download copyright-protected movies and music to their portable storage devices.

Allegations have been raised that FAB may have issued materially misleading business information to the investing public. On November 14, 2013, the blog Alfredlittle.com issued a report asserting that FAB Universal misstated its financial performance and engaged in piracy. Alfredlittle.com is written by Jon Carnes, who publishes his investment opinions of public companies, especially those operating in China. Carnes claims that FAB’s media kiosks are loaded with pirated movies and that FAB has overstated the number of media kiosks that it deployed. He asserts that FAB’s business in China is a fraction of what it purportedly claims in its filings with the SEC.

FAB Universal denies the allegations. The company press release states its “vehement denial of the recent allegations raised by short-sellers in their self-serving ‘reports’ and reaffirmed its commitment to providing the company’s shareholders with accurate information. FAB’s board of directors is working expeditiously to gather all the relevant information necessary to respond to these misleading and inaccurate reports in an appropriate manner and to report back to its shareholders as quickly as possible.”

FAB Universal (FU) is being removed from the Model Shadow Stock Portfolio on an emergency basis. While there is still a lot of debate about the company, it is clear that, at the very least, the data used in the decision to buy the company was flawed and, at worst, there may be extensive fraud. The January 2014 AAII Journal Model Portfolios column will discuss this in more detail. For further information on the Model Shadow Stock Portfolio, go to www.aaii.com/model-portfolios/stock.


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