vimc investors hold a worthless bag

WWW.TRINITYRESEARCHGROUP.COM DECEMBER 8, 2014

VIMC Investors Hold a Worthless Bag

VIMC INVESTORS HOLD A WORTHLESS BAG DECEMBER 8, 2014

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TABLE OF CONTENTS Disclaimer ....................................................................................................................................... 2Executive Summary ........................................................................................................................ 4List of Exhibits ................................................................................................................................ 5Introduction ..................................................................................................................................... 6The Government Giveth ............................................................................................................. 7

Government Corruption in the Chinese Technology Sector ..................................................... 7Shanxi, a Hotbed of Political Corruption .................................................................................. 8One of VIMCs Government Sugar Daddies Sacked ............................................................... 8Hidden Assets ........................................................................................................................... 9

Insiders Taketh Away ................................................................................................................... 13Its (Related) Party Time! ....................................................................................................... 13EmbezzleCo ............................................................................................................................ 15Step 1: Carve the Operating Value Out of the Business ......................................................... 17Step 2: Relist the Valuable Operations Where US Investors Cant Find You ........................ 20Step 3: Pillage the Land .......................................................................................................... 22Step 4: Bait and Switch US Investors ..................................................................................... 27

Pump and Dump ........................................................................................................................... 32Conclusion .................................................................................................................................... 37


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EXECUTIVE SUMMARY

SELL Target Price: $0 Ticker: Nasdaq:VIMC FD ADS Outstanding (mn): 23.8 Last Close: $6.41 Free Float (mn): 15.025 52 Week Range: $1.70 - 11.79 Ave. Daily Volume (ADS): 669,000 Market Cap (mn): $160 Short Interest (mn): 1.778

Over the past four years, assets we estimate to be worth over $600 million (4x the market cap of VIMC) were embezzled from VIMC into privately held related parties controlled by VIMCs co-founders and other insiders.

After looting VIMC of all its intrinsic value, insiders further enriched themselves by falsifying VIMCs financials and issuing numerous press releases to pump and dump the worthless US-listed shares.

Consequently, VIMCs US investors now unwittingly hold shares of a worthless

company, with no legal recourse to claim what was embezzled from them since it is now privately owned in China by the co-founders.

Although US investors will never recover what is rightfully theirs, some justice may ultimately be served as the family of VIMCs chairman is being investigated in a famous case of graft involving a government official named Shen.

We believe Shen, who is close to VIMC Chairman Deng, was one of several government sugar daddies VIMC used to illegally obtain valuable assets from the government to transfer to the co-founders.


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LIST OF EXHIBITS 1: VIMCs Major Dealings with the Government (Page 10) 2: VIMC Organizational Chart of All Historically Owned and Controlled Entities (Page 11) 3: Current VIMC Organizational Chart (Page 12) 4: Related Parties Disclosed in 2010-2013 20-F Filings (Page 13) 5: Related Party Transactions Disclosed in 2010-2013 20-F Filings (Page 14) 6: Flow Chart of Asset Transfers Disclosed in 2010-2013 20-F Filings (Page 16) 7: VIMCs Major Disposals, 2010-2013 (Page 17) 8: 2010-2012 Summary Financials for Vimicro Wuxi from SAIC Filings (Page 17) 9: Vimicro Wuxis 2010 Financials Filed with the SAIC (Page 18) 10: Vimicro Wuxis 2011 Financials Filed with the SAIC (Page 18) 11: Vimicro 2012 Wuxis Financials Filed with the SAIC (Page 19) 12: Vimicro Shenzens SAIC-Registered Business Scope Includes Real Estate Rental (Page 21) 13: Model Picture of Vimicro Shanghais Commercial Real Estate Project (Page 22) 14: Current Pictures of Vimicro Shanghais Real Estate Project (Page 23) 15: Shenzhen VMC Plaza Project Details (Page 25) 16: Construction of Shenzhen VMC Plaza, an EmbezzleCo Project (Page 26) 17: VIMCs Quarterly AR and Net Cash after Establishment of Zhongtianxin (Page 28) 18: VIMCs Revenue and Sequential Increase in AR from Related Parties, Q1 2013-Present (Page 28) 19: VIMCs Net Cash Position, Q1 2013-Present (Page 28) 20: Zhongtianxins Liabilities and Equity (Page 29) 21: Zhongtianxins Related Party Transactions (Page 30) 22: 2011 Press Releases (Page 32) 23: 2012 Press Releases (Page 33) 24: 2013 Press Releases (Page 34) 25: 2014 Press Releases (Page 35) 26: USD Value of Insider Sales, 2008-Q3 2014 (Page 36)


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INTRODUCTION It is no secret that corruption runs rampant within the Chinese government, where many senior officials have historically used their positions of power to enrich themselves and their cronies at the expense of the Chinese populace. One of the hallmarks of PRC President Xi Jingpings first two years in office is a solemn campaign to crack down on the highest levels of this corruption. Even senior government officials have not been immune to this crackdown, as evidenced by the recent investigation of Zhou Yongkang1. Many companies affiliated with corrupt government officials have lost much of their value as anti-graft investigations reveal the use of such companies as vehicles for embezzlement, bribery and financial fraud. In this report, we unveil how insiders of Chinese video semiconductor and surveillance camera manufacturer Vimicro International Corporation (VIMC), led by co-founders Deng Shonghan and Jin Zhaowei (the Co-Founders), systematically gutted over $600 million worth of government funding, government-granted real estate assets, and proceeds from commercial government contracts from the Nasdaq-listed VIMC for personal gain. We believe much of this value was derived by bribing government officials such as recently sacked Shen Weichen, former Party Secretary of Chinas Association for Science and Technology. Deng, VIMCs Chairman, is among the numerous businessmen implicated in the bribery and general corruption charges that resulted in Shens sudden ousting. The premeditation and callousness with which VIMCs Co-Founders built a company to serve as a vehicle for their exclusive enrichment makes VIMC the worst case of embezzlement (from both their company and the government) we have ever found. We discuss our findings in the following sections:

1. The Government Giveth. We discuss how the Co-Founders used their government connections to obtain hundreds of millions of dollars in valuable assets for VIMC.

2. Insiders Taketh Away. We examine the privately held vehicles used to transfer VIMCs assets to the Co-Founders. We reveal how the Co-Founders proceeded to loot VIMC of all its worth, transferring to themselves at nominal cost VIMCs only profitable business, its valuable real estate assets, and much of the cash over a three-year period. Accounting red flags were raised many times throughout the embezzlement bonanza of the past few years, but the management team was able to cover them up by firing CFOs and auditors who posed a threat to their accounting trickery.

3. Pump and Dump. Not content with their enormous embezzled gains, the Co-Founders then used a clever scheme involving related parties to maintain the appearance of VIMC as a valuable going concern, pumping its shares with inaccurate press releases and overstated financial reports. Predictably, they have been dumping their shares aggressively as duped US investors buy the pump.

1 http://thediplomat.com/2014/07/in-zhou-yongkang-xi-bags-the-ultimate-tiger/


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THE GOVERNMENT GIVETH Government Corruption in the Chinese Technology Sector Having declared the technology sector a key investment area for the growth of the Chinese economy, the government has invested hundreds of billions of dollars (trillions of RMB) over the past two decades to support domestic entrepreneurship, research and development in the sector. This government support, which is allocated through several regional and national government bodies managed by a select few, often takes the form of tax breaks and grants of funding, land for commercial use or commercial contracts with the government. As is typical within the Chinese political system, when that much responsibility and capital is left at the hands of an unmonitored few, the results are predictably corrupt. As reported on October 31, 2013 by China Youth Daily2, investigations by Chinas Ministry of Science and Technology into the allocation of RMB 2.42 trillion from 2006 to 2012 revealed shocking corruption that has triggered a revamping of the way the government monitors its research spending. It turns out the vast majority of research funding ultimately went not to the intended projects, but to corrupt cronies and accomplices of the government officials issuing the grants. The article reviews cases of bribery, embezzlement, accounting fraud to cover up missing funds, secret expense accounts to fund everything from everyday expenses such as meals to cars, and more.

Source: China Youth Daily 2 http://zqb.cyol.com/html/2013-10/31/nw.D110000zgqnb_20131031_1-06.htm


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Shanxi, a Hotbed of Political Corruption Shanxi, a province located in Chinas Northern region, is the countrys most infamous area for political corruption. Shanxi was one of the areas targeted by President Xis anti-corruption crackdown, especially this year. As noted on Wikipedia:

Since Xi Jinping's ascendancy to power at the 18th Party Congress, numerous highly ranked officials in Shanxi have been placed under investigation for corruption-related offenses, including four members of the province's highest ruling council, the provincial Communist Party Standing Committee They were all removed from office around August 2014... Shanxi was therefore the 'hardest hit' province during the anti-corruption campaign of 2013-2014. Targeted corruption investigations on such a massive scale was unprecedented; it amounted to a wholesale 'cleansing' of Shanxi's political establishment.

And the news about Shanxis widespread corruption keeps flowing. Last week, China.org.cn reported about some of the very recent political cleansing in Shanxi3, and this week, Caixin Online4 reported the highest-profile case yet about corrupt tie-ups between government officials and companies that bribe them for all types of illicit political favors. This was not an isolated case, as Caixin reports: a string of corrupt officials and former government employees have been uncovered recently. One of VIMCs Government Sugar Daddies Sacked Several Chinese media outlets reported earlier this year that Shen Weichen, a long-standing senior official in Shanxi who held various government posts such as Mayor of Taiyuan City, Secretary of Taiyuans Municipal Party Committee, Secretary of Shanxis Provincial Party Committee, and Party Secretary and then Vice Chairman of Chinas Association for Science and Technology, is one of the numerous officials who fell from grace this year. Throughout his long tenure as influential politico, Shen was apparently happy to do political favors for his cronies so long as he received considerable kickbacks from those who greased his palms. One news article5, dated 4/17/2014, concludes that more corrupt businessmen will be investigated and caught now that their government sponsor Shen has been sacked:

2

3 http://www.china.org.cn/china/Off_the_Wire/2014-11/26/content_34160236.htm 4 http://english.caixin.com/2014-12-02/100758187.html 5 http://news.163.com/14/0417/11/9Q1HLMGH0001124J.html


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Translation: Politicians say Shen Weichen was arrested due to corruption, the same reason as Jin Daoming, the Deputy Director of Shanxi people's Congress. Jin Daoming was arrested in February due to corruption. Some analysts believe that, then there will be more officials and businessmen in Shanxi province to be arrested.

The articles prediction has come true, and one of the businessmen affected is none other than VIMC Chairman and CEO Deng, who has been implicated with Shens corrupt practices now that his wife Tan Jing (a famous singer from Shanxi who was also Shens mistress while he was in power) is under investigation67:

Translation: Early this year a Shanxi singer (Tan Jing) got involved in the corruption case and was investigated by Chinas Investigation Bureau.

Translation: Tan Jing, is close to Shen Weichen. Internet users have pulled up Tan Jing's profile and said her husband named Deng is Vimicros Chairman.

It is also noteworthy that Deng used to work with Shen as a senior officer at the state-run Association for Science and Technology that Shen used to oversee. Hidden Assets VIMCs corporate history makes clear that the company was built in large part through government relationships from which funding, land rights, commercial contracts, and joint ventures were obtained. A careful read of VIMCs past eight 20-F annual reports shows that the company has been a beneficiary of government generosity since 2007, a watershed year for VIMC. Eight years after its founding in 1999, for seemingly no valid reason, VIMC became a favorite of the government. Starting that year, VIMC received grants of land at ultra-low prices in Shenzhen, Shanghai, and Nanjing (Jiangsu province); received follow-on funding (outright grants or loans) to develop that land; collaborated in two joint ventures (JVs) with the local governments of Tianjin and (no surprise) Shanxi province; and received R&D-related funding in Qingdao and Wuxi. The details are shown below in Exhibit 1. 6 http://www.ymysw.cn/List.asp?ID=7011 7 http://m.blogchina.com/blog/view/uname/zhenhepeng/bid/2235158


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Exhibit 1: VIMCs Major Dealings with the Government8

Shenzhen City Shanghai City Jiangsu Province Tianjin City Shanxi Province Qingdao CityDate 6/26/2007 11/15/2007 12/26/2007 and

2010-201212/29/2008 September 2013 2013

Event Acqusition of land use rights

Acquisition of land use rights

2007: Acquisition of land use rights2010-2012: receipt of RMB 42 million ($6.69M) in cash

Formation of Vimicro Tianjin, a JV with the government, and receipt of RMB 250 million ($36.6M) in cash

Formation of Zhongtianxin, a JV with the government, and receipt of RMB 98 million ($14.5M) in cash

Receipt of government grant in cash. VIMC is one of five companies to receive total of RMB 280 million ($45.5M)

Government entities

Shenzhen Municipal Bureau of Land Resources and Housing Management

Zhangjian Semiconductor Industry Park Co. Ltd. (state-owned entity)

Administrative Committee of Nanjing Xuzhuang Software Industry Base and Nanjing Xuanwu District Management and Investment of State-Owned Asset Holdings (Group) Co. Ltd.

State-owned Asset Management Corporation of Tianjin Economic-Technical Development Area ("Tinajin SAMC")

Shanxi Guoxin Investment (Group) Corporation, a financial holding group associated with the Shanxi government

City of Qingdao

Terms 3,947 square meters for $0.9 million

20,900 square meters for $5.7 million

80,000 sqare meters for $5.4 million

VIMC and the government each own 49.99% of the JV, co-founders' private company owns 0.02%

VIMC and the government each own 49% of the JV, co-founders' private company owns 2%

None

Ratioale Corporate use only (VIMC office building)

Corporate use only (VIMC office building)

Corporate use only (VIMC office building)

Design, manufacture and sale of digital video surveillance products

Focuus on security surveillance investment, services and products

Investment in city's businesses

Although we looked beyond the SEC filings to find some of these dealings, we think it is most likely the company had more such dealings that we were unable to find throughout our research process. We found the cash grants from the city of Wuxi (in Jiangsu province) and the cash grants from the city of Qingdao9 shown in Exhibit 1 not in SEC filings but from our own research of Chinese SAIC filings and local city governments public disclosures. Interestingly, none of the government asset grants were disclosed in the types of highly promotional (and, as we show later, misleading) press releases that VIMC loves to issue whenever it signs a new contract with the government. This year alone, VIMC has announced 11 such stock-pumping press releases promising hundreds of millions of future orders from the government10. We note that several of these deals were done with the infamous Shanxi government in the city of Taiyuan, no less, where most of the cases of graft and government-baked corporate fraud have been discovered this year by the Chinese central government. These press releases would have you believe 2014 was quite a year for VIMC, in spite of the fact that both the CFO and the auditor were inexplicably replaced. Instead of getting caught up in the pomp and circumstance of these announcements of government orders that never amount to much in audited financial performance, investors must take a closer look at the hidden value in the minimally disclosed government asset grants. We are happy to serve as your guide, since this hidden value is obfuscated by a complex organizational structure that makes it hard to track what is going on.

8 Source: 2010 20-F, 2010-2012 SAIC Filings, Qingdao City government website 9 http://govinfo.nlc.gov.cn/sdsqdfz/xxgk/qdsrmzf/201310/t20131010_4001224.shtml?classid=439 10 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-news&nyo=0


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Exhibit 2 (below) shows an organizational chart that maps all the business entities either currently or previously owned and controlled by VIMC. We denote those that received government aid in yellow.

Exhibit 2: VIMC Organizational Chart of All Historically Owned and Controlled Entities11

How and why VIMC, a nondescript hardware company with no real strategic value to China, managed to get so much from the government is not where we will focus, however. That investigation is better left to President Xi and his anti-graft campaign. As previously noted, having sacked the criminal Shen this year, the government is already on the case. What the Co-Founders did after VIMC received the government grants is considerably more interesting and worth a closer look. Note that Exhibit 2 (above) is backwards-looking and therefore does not represent VIMCs current organizational structure, which is shown in Exhibit 3 (below).

11 Source: 2010 20-F, 2010-2012 SAIC Filings, Qingdao City government website

VimicroFuzhou (PRC)

100%

Viewtel(USA)

100%Vimicro

Hong Kong (HK)

100%Vimicro

Sky-Vision (PRC)

(VIE)

Zhongtianxin(PRC)

51%Vimicro

Guangdong (PRC)

100%VimicroTianjin (PRC)

VimicroGuiyang (PRC)

49.9%

100%

VimicroBeijing (PRC)

VimicroJiangsu (PRC)

100%

100%

VimicroInternational Corporation

(Cayman Islands)

Vimicro Shanghai (PRC)

100%

Vimicro Wuxi (PRC)

100%

Vimicro China (PRC)

100%

Vimicro Shenzhen (PRC)

100%

Denotes beneficiaries of dealings with government

VimicroSky-Vision

(PRC)

50.95%


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Exhibit 3: Current VIMC Organizational Chart12

To state the obvious, Exhibits 2 and 3 are not the same. Where did all the government aid go??

12 Source: 2013 20-F

VimicroInternational Corporation

(Cayman Islands)

VimicroHong Kong

(HK)Viewtel(USA)

VimicroBeijing (PRC)

VimicroFuzhou (PRC)

VimicroGuangdong

(PRC)VimicroTianjin (PRC)

Zhongtianxin(PRC)

VimicroSky-Vision

(PRC)

VimicroJiangsu (PRC)

VimicroGuiyang (PRC)

100%100%100%100% (VIE)51%49.9%100%

100%100%

Vimicro China (PRC)

100%


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INSIDERS TAKETH AWAY Its (Related) Party Time! VIMCs 20-F annual reports are chock full of potential conflicts of interest and governance-related red flags. Trying to follow the related party transactions and the interrelationships between VIMC and its various related parties is dizzying. What is crystal clear is that every significant business venture, divestiture, disposal, or dealing with the government appears to involve some private vehicle controlled by the Co-Founders and other insiders. If you muster up the patience to sort through all the transactions and the fine print in the disclosures, you can find the Co-Founders fingerprints all over the placenot solely through VIMC itself, as you would expect at a respectable company, but through a shady network of private vehicles controlled by the Co-Founders. Below are the disclosed related parties from the past four 20-F annual reports.

Exhibit 4: Related Parties Disclosed in 2010-2013 20-F Filings Name of related parties Relationship with the GroupTianjin SAMC Non-controlling shareholder of Vimicro TianjinNingbo Sunny Opotech Co. Ltd Non-controlling shareholder of VisiondigiVimicro Wuxi Owned by certain executives of the CompanyVMF Consulting Company Owned by certain executives of the CompanyVimicro Qingdao 18% equity investee of the CompanyZhongtianxin 51% equity investee of the CompanyVisiondigi 12.03% equity investee of the CompanyVimicro Tianshi Owned by certain executives of the CompanyVimicro Xingguang Owned by certain executives of the CompanyIndividual shareholders of Visiondigi Non-controlling shareholders of Visiondigi And below are the corresponding disclosed related party transactions since 2010.


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Exhibit 5: Related Party Transactions Disclosed in 2010-2013 20-F Filings Unit: USD thousands For the Year Ended December 31, Transactions 2009 2010 2011 2012 2013Sales of Goods:Ningbo Sunny Opotech Co. Ltd - 329 72 - - Vimicro Wuxi - 2,764 - - - Vimicro Qingdao - - 4,193 333 - Zhongtianxin - - - - 21,308 Tinanjin SAMC - - - 523 828 Total - 3,093 4,265 856 22,136 Purchase of Inventories:Ningbo Sunny Opotech Co. Ltd - - 64 - - Zhongtianxin - 391 - - 3,721 Total - 391 64 - 3,721 Technical Service Fee Rendered:Vimicro Wuxi - 175 - - - Technical Service Fee Rendered:Vimicro Wuxi - - 175 - - Loan from Related Parties:Vimicro Wuxi - 11,325 - - - Repayment of Loan from Related PartiesVimicro Wuxi - 6,795 - - - Proceeds from Disposal of Assets in Discotinued OperationVMF Consulting - - 1,734 - - Proceeds from Disposal of Assets in Discotinued OperationVimicro Wuxi - - 4,955 - -

BalancesAmounts Due from Related Parties:Vimicro Tianshi - - - - 5,000 Vimicro Qingdao - 1,651 4,257 3,200 77 VMF Consulting Company - - - 430 450 Vimicro Wuxi - 8,751 477 2 33 Tianjin SAMC - 59 97 422 885 Ningbo Sunny Opotech Co. Ltd - 2 - - - Visiondigi - - - 64 - Individual Shareholders of Visiondingli - 2 - - - Zhongtianxin - - - 107 19,375 Total - 10,465 4,831 4,225 25,820 Amounts Due to Related Parties:Vimicro Wuxi - 4,532 676 513 204 Individual Shareholders of Visiondingli - 145 - - - Ningbo Sunny Opotech Co. Ltd - 171 - - - Zhongtianxin - - 287 1,671 6,836 Total - 4,848 963 2,184 7,040 Especially confusing are the related parties named Vimicro something-or-other. Why are there so many related parties also named Vimicro? Isnt Vimicro the name of the company listed on the Nasdaq whose shares and assets investors supposedly own when they buy VIMC? The answer to what should be a simple question to answer is both yes and no, and therein lies the rub. Yes, the name of the Nasdaq-listed company with ticker VIMC is Vimicro International, that much is true. But no, VIMC investors most definitely do not own the assets they were entitled to when they bought VIMC shares. What duped VIMC investors fail to realize is that all the other Vimicros listed in the 20-Fs, which they should own but in fact no longer own at all, were


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embezzled by Co-Founders and their complicit insiders. The various Vimicros marked in the 20-Fs as owned by certain executives of the Company are nothing more than vehicles for the transfer of VIMCs assets to the insiders. Bear with us, because understanding the role of each major related party is the key to seeing how clever and crooked the VIMC embezzlement scheme really is. EmbezzleCo There are two related parties in particular that should make the hair on the back of any US regulators neck stand way up: VMF and VMF Consulting Company, an affiliate of VMF. VMF first makes its appearance in VIMCs filings in the 2010 20-F. Page 29 of that document describes VMF as follows:

Vimicro Management Foundation (VMF), a limited partnership established by certain members of our management to provide investment, charity and consulting services.

That looks benign enough, doesnt it? Especially with the charity thrown in there. How good of the management team . Except that page 30 of the same 20-F raises multiple huge red flags about this VMF company:

Vimicro Wuxi was formed in July 2009 as our regional headquarters to conduct research and development radio frequency chips and develop related businesses. In December 2010, we injected our analog integrated circuit, MP4, advanced multimedia and blue tooth businesses (the Non-core IC Businesses) into Vimicro Wuxi, and entered into definitive agreements to transfer 95% of our equity interest in Vimicro Wuxi to VMF Consulting Company for cash consideration. We also expect to transfer all of our equity interest in Vimicro Jiangsu, Vimicro Shenzhen and Vimicro Shanghai to VMF Consulting Company for cash consideration, subject to government approvals.

Why were all these Vimicros (Wuxi, Jiangsu, Shenzhen and Shanghai to be exact) transferred out of VIMC? If Vimicro Wuxi was formed in July of 2009 and was important enough to warrant injecting four different businesses into it just a year later (analog IC, MP4, advanced multimedia and bluetooth), why is it being sold? And what about the three other Vimicros? Why are they too being sold? Most importantly, who is VMF Consulting Company, the buyer? According to page 30:

VMF Consulting Company is a company established by several management members of our company to implement the business restructuring plan on behalf of VMF. Both VMF and VMF Consulting Company are managed by Mr. Xiaodong (Dave) Yang. As a result of the foregoing transfer, we currently own 5% of Vimicro Wuxi. We expect to complete the registration of the transfer of our equity interest in Vimicro Jiangsu, Vimicro Shenzhen and Vimicro Shanghai in 2011 or 2012. Upon successful registration with relevant government authorities, we will no longer hold any equity interest in Vimicro Jiangsu, Vimicro Shenzhen and Vimicro Shanghai.


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Interestingly, after this whopper of a disclosure, the 20-F for the following year, 2011, describes VMF a little differently (on page F-10) than in previous years:

Vimicro Management Foundation (VMF) which is a venture capital fund managed by certain members of the Companys management.

It took only a year, after all those Vimicros were divested, of course, for VMF to go from charity, investment and consulting services to managing insider money in a privately held VC fund. VMF and its affiliate VMF Consulting Company are the keys to transferring shareholder value out of VIMC and into the Co-Founders pockets. To simplify some of the related party complexity and confusion caused by various similarly named entities, we refer to VMF and VMF Consulting Company as EmbezzleCo and refer you back to Exhibits 2 and 3. Remember when we asked where all the government aid went? Now you know: EmbezzleCo.

Exhibit 6: Flow Chart of Asset Transfers Disclosed in 2010-2013 20-F Filings

Exhibit 7 (below) lists all major disposals of VIMC subsidiaries.

PRC Government

EmbezzleCo(private company

owned by insiders)

VIMC(public company

owned by US investors)

Jiangsu Province

Shanghai City

Shenzhen City

Qingdao City

Vimicro Wuxi

Vimicro Shanghai

Vimicro Shenzhen

Vimicro Qingdao

Funding

Land

Land

Funding

Most ValuableBusinesses

+Land

+Funding


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Exhibit 7: VIMCs Major Disposals, 2010-2013 Date Entity Disposed Description (from 2013 20-F) Counterpary Net Consideration Rationale for Disposal (from 2013 20-F)Dec-2010 Vimicro Wuxi Conducts R&D of RF chips and related

businesses. Consolidated VIMC's analog IC, MP4, advanced multimedia and bluetooth businesses

EmbezzleCo (VMF Consulting Company)

$1.4 million Unprofitabe non-core business

Dec-2011 Vimicro Qingdao Mobile phone multiprocessor business EmbezzleCo (VMF Consulting Company) and "two former key employees"

$2.9 million Unprofitable, not part of focus, wanted to streamline cost structure

Dec-2012 Vimicro Shanghai Holds land use rights to a parcel of undeveloped land originally planned for non-core IC business use. No significant operations

EmbezzleCo (thorugh Vimicro Xingguan, an affiliate of VMF Consulting Company)

$10.4 million To divest land rights

Apr-2013 Vmicro Shenzhen Holds "in-substance" amount of real estate. No significant operations

EmbezzleCo (thorugh Vimicro Tianxi, an affiliate of VMF Consulting Company)

$10 million To divest real estate

TBD Vimicro Jiangsu No significant operations. Holds land use rights and received RMB 52 million from government (through Xuanwu SAMC, a state-owned entity) to develop property on that land

TBD (intended to be EmbezzleCo) TBD To divest real estate

The counterparty to VIMC for all these disposals was EmbezzleCo. Why are insiders, and never a third party, so keen on buying these assets presumably not worth keeping around at VIMC? Why wasnt a commercial auction process used to dispose of them instead of defaulting to insiders as exclusive bidders every time? Step 1: Carve the Operating Value Out of the Business Page 25 of the 2011 20-F has the following rationale for the disposal of Vimicro Wuxi to EmbezzleCo:

In December 2010, in order to focus on our growing surveillance and security businesses, we disposed of our loss-making non-core IC businesses (which forms part of our multimedia processor business) to VMF Consulting Company, a related party controlled by certain members of our management team and managed by Dr. Xiaodong (Dave) Yang, one of our directors, for cash consideration.

The Co-Founders would have you believe Vimicro Wuxi was disposed of because it was loss-making and therefore presumably not worth the bother. But filings with the Chinese government paint a completely different picture. Exhibit 8 (below) shows a table summarizing key financials from the SAIC filings in English. Below that, Exhibits 9-11 show the supporting evidence: photos of Vimicro Wuxis SAIC filings for 2010-2012 in Chinese.

Exhibit 8: 2010-2012 Summary Financials for Vimicro Wuxi from SAIC Filings

Figures in millions 2010 2011 2012RMB USD RMB USD RMB USD

Revenue 5.10 0.75 41.00 6.34 75.70 12.00 Net profit 0.46 0.07 27.00 4.18 35.50 5.63

Total Assets 93.50 13.82 125.80 19.46 184.00 29.16 Government Subsidies - - 17.00 2.63 25.60 4.06


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Exhibit 9: Vimicro Wuxis 2010 Financials Filed with the SAIC

Income Statement

Balance Sheet

Exhibit 10: Vimicro Wuxis 2011 Financials Filed with the SAIC

Income Statement

Balance Sheet


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Exhibit 11: Vimicro 2012 Wuxis Financials Filed with the SAIC

Income Statement

Balance Sheet


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Not only was Vimicro Wuxi profitable when it was soldand therefore not loss-making, as falsely alleged in the 20-Fit had a 66% profit margin in 2011 and grew revenue a whopping 8.2x year on year in 2011, immediately after it was sold in December of 2010. It then proceeded to nearly double revenue in 2012. A year after disposing of Vimicro Wuxi to EmbezzleCo, VIMC also sold them Vimicro Qingdao. Again, the rationale for this sale was the disposal of a non-core, unprofitable business, and EmbezzleCo paid VIMC $2.9 million (see Exhibit 7) for it. Why would EmbezzleCo pay anything for a worthless unprofitable business, you ask? Because it is anything but worthless and unprofitable, as you will see in the next section. For starters, shortly after buying Vimicro Qingdao for $2.9 million, EmbezzleCo received $6.9 million in funding from the government (refer to Exhibit 1)! Step 2: Relist the Valuable Operations Where US Investors Cant Find You If the SAIC filings are not proof enough that the Co-Founders stole VIMCs only valuable businesses for their personal gain at the expense of shareholders, then what do we make of the Co-Founders plan to IPO Vimicro Wuxi, the allegedly unprofitable non-core business not fit to be public anymore? This news article discusses Vimicro Wuxis IPO plans in some detail: http://www.js136.cn/article/201312/9716.html. The article states Vimicro Wuxi, a company so valuable that it recently received a national industry award for technical achievement, is planning an IPO in Chinas domestic A-share market after continuing its exceedingly strong financial trajectory, growing 50% year on year in 2013 to roughly RMB 300 million in sales. Throughout our due diligence we learned that Vimicro Wuxi had been consolidated in 2013 with Vimicro Qingdao (as discussed, also transferred to EmbezzleCo), which explains the substantial difference in revenue between Vimicro Wuxis 2012 SAIC-reported financials from Exhibit 12 (RMB 75.7 million) and those announced by the media article, i.e. 50% year on year growth to RMB 300 million in 2013, which implies RMB 200 million in 2012 revenue. The choice of listing venue for Vimicro Wuxi is quite telling. Why would a team that successfully IPOd their company in the US choose to spin off a privatized subsidiary in China? Because, once gutted of all its value, the US-listed VIMC is not worth anything and therefore the founders have nothing to lose in the US while they have everything to gain in China, where no US investor has ever successfully laid claim to assets due to them by a US-listed company, whether fraudulent or not. In China, which does not recognize US law, US investors have no legal leg to stand on. Chinas domestic market values semiconductor companies growing at Vimicro Wuxis high pace at a minimum of 3x sales, so an IPO at the low end of likely pricing would yield a RMB 900 million outcome (that is over $146 million, or the entire market cap of US-listed VIMC) for the Co-Founders.


PAGE 21 / 37

What is that in returns, you ask? To calculate returns, we must first recall what EmbezzleCo paid for the business. As Exhibit 8 shows, the net consideration for Vimicro Wuxi and Qingdao together was $1.4 + $2.9 million, or a mere $4.3 million. That works out to a 34x return for the wily Co-Founders. Had the greedy insiders stopped there, they might have gotten away with everything unnoticed or at least unperturbed. After all, what does the Chinese government care if all the operating value was gutted from VIMC, a US-listed entity, even if a few American investors got fleeced out of a couple hundred million dollars in the process? But remember, Vimicros Wuxi and Qingdao werent the only VIMC subsidiaries EmbezzleCo embezzled. It is in dealing with the other transfers that Chairman Deng likely got into trouble, since all those other subsidiaries had very significant dealings with the Chinese governments most prized assets: the governments land. Recall from Exhibit 1 that the land granted to VIMC was specifically intended for the companys own corporate use, to build office buildings for its own use. Isnt it interesting, then, that SAIC filings for the embezzled subsidiaries show real estate rental to third parties in their newly expanded business scope?

Exhibit 12: Vimicro Shenzens SAIC-Registered Business Scope Includes Real Estate Rental


PAGE 22 / 37

Step 3: Pillage the Land On December of 2012, VIMC sold Vimicro Shanghai to EmbezzleCo for $10.4 million largely for the value of its real estate assets. In doing so, it failed to run a proper auction process that involves bidders other than the insiders at EmbezzleCo. Instead, according to the 20-F disclosures, VIMC used third-party consultants to assess the value. Whether these consultants were paid shills or affiliates of EmbezzleCo we will never know, but one thing is crystal clear: they were not objective appraisers of land. The following excerpt can be found on page 41 of VIMCs 2007 20-F:

On November 15, 2007, Vimicro Shanghai entered into an agreement with Zhangjiang Semiconductor Industry Park Co., Ltd. pursuant to which, in consideration of approximately US$5.7 million, to be paid in installments, Vimicro Shanghai would acquire land use rights for approximately 20,900 square meters of land in Zhangjiang Hi-Tech Park, Shanghai.

Vimicro Shanghais lot of land is home to a handsome commercial project that is expected to look like this when completed:

Exhibit 13: Model Picture of Vimicro Shanghais Commercial Real Estate Project13

Below are some pictures we took in person that show the outstanding progress being made on the construction of this commercial building.

13 http://www.jiangs.com.cn/ProjectsImg_show.aspx?ProjectID=158


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Exhibit 14: Current Pictures of Vimicro Shanghais Real Estate Project

Even a quick glance at these pictures is enough to make EmbezzleCos acquisition price for this real estate laughable, but if it is not worth $10.4 million, then what is it worth? It is not difficult to objectively assess the value of the 20,900 square meters of commercial development in Shanghai. We use two approaches to estimate the value: assessing the average price per square meter in the area and using recent listing or transaction prices of comparable projects. According to Landvalue.com.cn, a leading online real estate industry resource, rights for the use of land in Shanghai currently averages RMB 38,195 per square meter ($6,210/sq. m.). So the regional average price of land suggests Vimicro Shanghais land use rights have a current market value of RMB 798,275,500 million (approximately $129.8 million). Let us not forget, this is the value of the land itself. When a developed projects worth is considered, the value goes up. A lot, it turns out, per reasonable comps we derived from discussions with real estate agencies in the area. The closest


PAGE 24 / 37

comp we were able to find is a little dated, having been sold in 2012, but it is a 41,000 square meter building in the exact same location, Shanghai Zhangjiang Hi-Tech Park. That building was sold almost three years ago in early 2012 for RMB 700 million (approximately $113.8 million).14 Vimicro Shanghais project is being erected on a considerably larger lot with a target of 76,000 square meters of commercial space (nearly double that of our comp) by its July 2015 completion. Conservative estimates from our real estate agency conversations based on a project 1.85x larger than our comp (76,000 vs. 41,000) being sold 3.5 years after our comp (July 2015), point to a value north of RMB 2 billion (over $325 million). No matter which range of estimated values you believe, there is absolutely no way Vimicro Shanghai was worth the $10.4 million that EmbezzleCo paid for it. Lets move on to the next city. How great a deal did EmbezzleCo get in Shenzhen? Refer back to Exhibit 7, which shows Vimicro Shenzhen was sold to EmbezzleCo for a consideration of $10 million. According to page 41 of the 2007 20-F filing, the Shenzhen subsidiary also had significant real estate assets:

On June 27, 2007, Vimicro Technology entered into an agreement with Shenzhen Municipal Bureau of Land Resources and Housing Management, pursuant to which, in consideration of approximately US$0.9 million, we acquired land use rights for approximately 3,947 square meters of land in Shenzhen High-Tech Industrial Park. The land will be the site of a new building, which will become Vimicro Technologys office building and accommodate a research and development center. Governmental authorities require us to obtain necessary governmental approvals for the proposed project.

Although 3,947 square meters in Shenzhen does not appear to be the real estate bonanza hidden in Vimicro Shanghais 20,900 sq. m. lot of land, appearances are deceiving. Shenzhen, also a Tier 1 city, has had one of the hottest real estate markets in China over the past five years, so much so that the region leads all of China in secondary property sales, a clear sign of real estate market maturity. EmbezzleCos Shenzhen project is in a prime location in one of the most expensive areas of Shenzhen, in the central business district next to Changhong Plaza. Although the lot of land is not as big, its location allows for the construction of tall buildings. When the Shenzhen project is completed, it will have 48,000 square meters of commercial real estate distributed over 30 floors. Below are some of the details of this project found online and on the website of the construction company managing this project.

14 http://finance.ifeng.com/stock/gsgg/20120105/5399879.shtml


PAGE 25 / 37

Exhibit 15: Shenzhen VMC Plaza Project Details

Translation of key items:

Project size: 48,000 sq. m. Number of Floors: 30

Investment: RMB 65 million

Translation of key items:

Project start date: 5/22/2013 Size of lot of land: 3,947 sq. m.


PAGE 26 / 37

Right after Vimicro Shenzhen was transferred to EmbezzleCo, the Co-Founders began construction of the Shenzhen VMC Plaza project in 2013. A search on Baidu reveals the project is under construction now, as evidenced by this picture from Baidu Maps:

Exhibit 16: Construction of Shenzhen VMC Plaza, an EmbezzleCo Project

A little research on Soufun (land.fang.com), Chinas dominant online real estate website, provides some comps for what this property will be worth upon completion. To provide a fair range of possible values, we looked for a building in a much less desirable location but in the same district to estimate the low end of our estimated range. It is harder to estimate the higher end, since properties near VMC Plaza are in such a desirable location that they are seldom sold. So we used rental prices, which are readily available on Soufun, to find comps for properties sold that generated similar rental income. On the low end, we found a property that sold for RMB 13,000/sq. m.15 VMC Plaza will have 48,000 sq. m., so that comp suggests a low end value of RMB 624 million, about $101.5 million. For our high end estimate, we used the rental cost of VMC Plazas adjacent building, Changhong Plaza. According to Soufun, Changhong Plaza rents for RMB 110/sq. m./month, which is quite close to the rental cost of commercial property in Shanghais Zhangjiang Hi-Tech Park (RMB 3.43/sq. m./day16, or RMB 103/sq. m./month). Therefore, on the high end, EmbezzleCos Shenzhen property should sell for a similar price to its Shanghai property, or about RMB 2 billion (over $325 million). 15 http://land.fang.com/financing/177256.html 16 http://zhangjiangruanjianyuan.fang.com/


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Step 4: Bait and Switch US Investors So far, we have shown the Co-Founders transferred to themselves over $146 million of business value (Vimicro Wuxi and Vimicro Qingdao), approximately $325 million of real estate in Shanghai, and approximately $213 million of real estate in Shenzhen (using the very conservative mid-point of our low and high end estimates). That totals $684 million. What can possibly be left in the Nasdaq-listed VIMC? Judging from the companys inability to ever turn a meaningful profit, probably not much, right? The answer is zero, and in this section we will show how the Co-Founders used two JVs with the government to massively inflate revenue while reversing the companys significant net cash position to net debt in the process. Recall from Exhibits 1 and 2 that VIMC entered into two JVs with the government. An analysis of the structure of those JVs raises the biggest of the many red flags yet, which is saying something given our analysis so far. The first JV, Vimicro Tianjin, was established with the Tianjin government in December of 200817. This JV is 49.99% owned by VIMC, 49.99% owned by Tianjin, and 0.02% owned by none other than EmbezzleCo. The combined stakes of VIMC and EmbezzleCo give the Co-Founders effective control, even though VIMCs sub-50% stake gives off the impression they dont have it. The second JV, Zhongtianxin, was established with the notoriously corrupt Shanxi government in September of 201218. This JV is 49% owned by VIMC, 49% owned by Shanxi, and 2% owned by EmbezzleCo. Again, the Co-Founders are in control without looking like they are. The 0.02% stake in particular is downright farcical. There is absolutely no operating or business reason to organize a JV this way But there sure is a very good accounting reason. This clever structure creates two related parties that do not need to be consolidated with VIMC for accounting purposes since VIMC ostensibly owns a non-controlling interest. In other words, the Co-Founders created two related parties they control with which they can do anything they want without having to report numbers to the SEC. And anything they want is exactly what they did. Behold Exhibit 17 (below), which shows what happened to VIMCs accounts receivable (AR) from related parties and net cash, starting in 2013, right after the JV with the crooked Shanxi government was established.

17 Source: 2013 20-F, page 30 18 Source: 2013 20-F, page 32


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Exhibit 17: VIMCs Quarterly AR and Net Cash after Establishment of Zhongtianxin

In case the important trends are not obvious, here they are in chart format.

Exhibit 18: VIMCs Revenue and Sequential Increase in AR from Related Parties, Q1 2013-Present

Exhibit 19: VIMCs Net Cash Position, Q1 2013-Present

VIMC ended 2012 with $28.8 million of AR, or 40% of its $71.2 million in revenue. Not exactly world-class, but it doesnt scream fraud either. By the time Zhongtianxin was in place, VIMC ended 2013 with $50.8 million in AR, almost double that of 2012, or 79% of its $64.5 million in revenue! And the trend goes on. More than all of last quarters $27.6 million in revenue was attributable to an increase in AR ($31.1 million), and 89% of it was attributable to AR from related parties. A collection problem with this AR would nullify all Q3 sales and then some.

Unit: USD thousands FY2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014Revenue 71,187 7,854 11,091 24,153 21,425 16,408 24,033 27,600

Accounts and Notes Receivable, Net of Provision 24,564 19,807 23,792 24,543 24,996 23,038 18,767 25,453 Amounts Due from Related Parties, Net of Provision 4,225 4,016 5,497 13,978 25,820 34,879 40,093 64,542 Total 28,789 23,823 29,289 38,521 50,816 57,917 58,860 89,995

Sequential Increase/(Decrease) in AR from Related Parties, Net of Provision (209) 1,481 8,481 11,842 9,059 5,214 24,449 % of Revenue N/A 13.4% 35.1% 55.3% 55.2% 21.7% 88.6%

Cash and cash equivalents 55,532 48,070 31,942 31,014 35,869 23,423 22,445 27,585 Long-term bank loans and liabilities 4,800 17,500 21,000 21,200 23,900 26,000 29,200 29,900 Net Cash 50,732 30,570 10,942 9,814 11,969 (2,577) (6,755) (2,315)

(10,000) -

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

FY2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

Revenue Sequential Increase/(Decrease) in AR from Related Parties, Net of Provision

(10,000) -

10,000 20,000 30,000 40,000 50,000 60,000

FY2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014


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If that is not alarming enough, since Zhongtianxin was established, nearly $51 million of VIMCs net cash has evaporated and turned into over $2 million of net debt. Is it any wonder VIMC had to find both a new CFO19 and a new auditor20 this year? In former auditor E&Ys defense, they did provide the accounting smoking gun in the 2013 20-F they signed off on before they hit the road in 2014. There is a major difference between the 2013 and the 2012 20-Fs. When Zhongtianxin was established in late 2012, it flew under the auditors radar for the 2012 20-F because it was just ramping up, and its pernicious impact on VIMCs financials had not fully kicked in yet. E&Y was not on to the 49%+2% accounting chicanery that the Co-Founders used to keep Zhongtianxins numbers off of VIMCs financials. Obviously, 2013 was a whole different story. By then, it was beyond obvious that something was going on with Zhongtianxin. We interviewed industry executives familiar with this matter and learned that the reason behind this years downgrade in auditor from E&Y, a Big 4 firm, to Grant Thornton was E&Ys insistence that the 49%+2% scheme was not going to pass muster for the 2013 20-F. E&Ys mea culpa for not reporting Zhongtianxins financials in 2012 can be seen in Exhibit 15.3 all the way in the back of the 2013 20-F, where the offending Zhongtianxins financials are reported for the first time. And when you look at the numbers, is it any surprise that there are $19.4 million of accounts payable to related parties?

Exhibit 20: Zhongtianxins Liabilities and Equity21

Note the ominous note at the bottom of Exhibit 20, which leads us to NOTE-12, where the truth is finally told.

19 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1922940 20 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1957800 21 Source: 2013 20-F, page F-3 of Exhibit 15.3


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Exhibit 21: Zhongtianxins Related Party Transactions

100% of Zhongtianxins accounts payable is to VIMC. Exhibit 17 shows that VIMC had $25.8 million in AR from related parties at the end of 2013, and now we know that $19.4 million (or 75%) of them are Zhongtianxins. Moreover, of VIMCs roughly $50 million of revenue in 2013, over $27 million of it (a whopping 54%) was from purchase of inventories by none other than Zhongtianxin. Whats more, having purchased $27 million worth of product from VIMC, Zhongtianxin generated all its $26.4 million of revenue from VIMC, the vast majority of which has yet to be collected. In case you do not follow, that revenue is not revenue and the AR from Zhongtianxin is not receivableit will never be collected. Its fake! How else can it be possible that one year after its establishment, Zhongtianxin (which is really just another name for VIMC, which controls it) is by far VIMCs biggest customer, a customer so big that it accounted for 54% of VIMCs 2013 revenue and 89% of its revenue last quarter, and most of that revenue has yet to be collected. Would any investor knowingly invest in a company who is its own biggest customer and generated nearly all of its sales last quarter from itself, failing to collect most of that revenue? So if 54% of VIMCs 2013 revenue was generated from itself (Zhongtianxin), what do we make of the rest of the 46%? Is it legit? In other words, is the glass just 54% empty or completely empty? We answer that question by reminding you that Zhongtianxin was only one of two JVs structured in the shadiest of ways, using the 49%+2% technique to try to divert attention from what was going on. E&Y was diligent enough to force the inclusion of Zhongtianxins financials in the 2013 20-F, but E&Y was also negligent enough to not force the same treatment on Vimicro


PAGE 31 / 37

Tianjiin, the other JV. After all, VIMCs 49.99% stake in it combined with EmbezzleCos 0.02% stake does in fact add up to exactly 50.01%, which, like the 51% stake the Co-Founders have in Zhongtianxin, is a number greater than 50%. The obvious reality of this situation is that after gutting VIMC, the Co-Founders bait-and-switched the valuable assets that belonged to US investors with fabricated financials courtesy of related party transactions with the likes of their shady partnership with Shanxi, the most corrupt local government in China.


PAGE 32 / 37

PUMP AND DUMP VIMCs Co-Founders must love the famous Gordon Gecko quote, Greed is good. Not content with EmbezzleCos enormous gains, they went to the seemingly endless VIMC well one final time with the clever scheme we just discussed involving JVs they controlled. After all, if you can hide it, what better customer is there than yourself, especially if you never have to pay yourself for the revenue you generated by selling products to yourself? Using these JVs, whose financials they thought they could get away with not disclosing, the Co-Founders successfully duped US investors and maintained the appearance of a valuable going concern at VIMC for a while until your friends at Trinity Research Group caught on. Zhongtianxin established in 2012, the Co-Founders revved up the old PR machine and let her rip. To see how aggressive they were, examine the progression of press releases before and after Zhongtianxin was established.

Exhibit 22: 2011 Press Releases

In 2011, only one government deal was announced22, and it was completely benign, since it announced a non-profit alliance to promote a technical standard. 2012 was more interesting.

22 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1601046


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Two government deals were announced. The first23, with Fuzhou, involved an allocation of land (3,000 square meters), some free cash (RMB 30 million) and an interest-free loan (RMB 60 million). We all know where those assets are going, dont we? The second deal was the announcement of the Zhongtianxin JV on 9/12/2012. Very interesting indeed is the fact that just a month later, when you would think executives would be celebrating the big deal, CFO Richard Wu quit. David Tang, a long-time colleague of the Co-Founders had to take his place. The fun begins in 2013.

23 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1703481


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On 4/3/2013, CFO Tangs role was changed to Chief Strategy Officer and Jimmy Dong was hired as Chief Controller, presumably to oversee VIMCs books in the absence of a CFO. By Q3, the PR machine was ready for action, and two large government deals were announced. The first24 was a deal for the offensive Zhongtianxin with an unnamed government customer (a vague reference to a large Chinese city is all we got) and was worth $20 million. The second25 was with Sichuan Province and was worth $14.5 million. 2013 ended with a bang when Zhongtianxin delivered a $41 million order from Baoding City26, and in 2014, the PR machine went into overdrive.

24 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1841091 25 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1859711 26 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1883671


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The government really delivered for VIMC this year, with 11 deals and one huge line of credit and the year is not even over. Things were so exciting that nobody seemed to care that the CFO position changed again with the hiring of Peter Li and that E&Y was replaced as the auditor. But what is a good pump without an even better dump?


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Exhibit 26: USD Value of Insider Sales, 2008-Q3 2014

If VIMC insiders were excited about the future of their business due to all those government deals, they certainly failed to put their money where their mouth was.

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

12/29/

2008

9/10/2

0099/1

0/2009

9/21/2

00911/

19/200

98/1

8/2010

9/27/2

0109/2

8/2010

9/29/2

0109/3

0/2010

12/21/

2010

12/22/

2010

12/23/

2010

12/28/

2010

12/31/

2010

12/12/

2011

12/23/

2011

12/6/2

0126/2

5/2013

8/27/2

0139/2

7/2013

6/16/2

0146/1

8/2014

6/20/2

0146/2

5/2014

6/30/2

0147/1

/2014

7/3/20

147/1

0/2014

7/15/2

0149/2

/2014

9/3/20

149/5

/2014

9/8/20

149/1

1/2014

9/12/2

0149/1

6/2014

9/19/2

0149/2

3/2014

9/24/2

0149/3

0/2014


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CONCLUSION There are very few zeros in investing. Nevertheless, we believe VIMC is one of them. Somewhere north of $600 million of hidden value, the majority of which was likely obtained from corrupt government officials, was systematically transferred to the Co-Founders over a four-year period through an embezzlement scheme that clever accounting tried to hide. After being gutted of all its worth, all that is left of VIMC is the illusion of VIMC as a going concern. That illusion is propped up by falsified financials derived from clever accounting trickery that attempts to hide the fact that VIMC itself became its own biggest customer once all its business value was embezzled. VIMC is not only its own biggest customer, generating most of its own revenue (through corrupt JVs), but it is also its own worst customer since the majority of that revenue it generates by selling product to itself has not been and likely never will be collected. If you are long VIMC, we sincerely feel for you. You have no legal recourse to claim the assets you were rightfully entitled to when you bought your shares. As painful as it may be to admit that you were duped, we remind you that pride is an investors worst enemy and even a penny is worth more than zero. If you are short VIMC, congratulations. You were right. If you are not involved but want to make money, we strongly recommend shorting VIMC in size. While borrow may not be available (believe us, we know), you are in luck because VIMC is an optionable security. We recommend buying puts or selling calls to short VIMC all the way down to zero.

vimc investors hold a worthless bag

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