Who's Right in the Battle Over Harbin Electric?

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Will the drama ever end?

Perhaps even more entertaining than a mid-afternoon soap opera is the "anything you can do, I can do better" match still brewing between electric motor manufacturer Harbin Electric (NAS: HRBN) and investment research firm Citron Research.

Citron Research, if the name sounds familiar, is responsible for bringing bearish research reports and damaging fraud allegations against such stocks as China Biotics, ZAGG (NAS: ZAGG) , Sky-Mobi (NAS: MOBI) , Deer Consumer Products (NAS: DEER) , Longtop Financial and, of course, Harbin Electric. Among Citron's primary claims are that Harbin is lying on its SEC statements, that its CEO Tianfu Yang doesn't have adequate financial backing to complete a buyout, and that Yang's fiduciary responsibilities to shareholders are questionable at best. Again, this is just a brief summary of Citron's manifesto of reasons to avoid Harbin.

Harbin Electric, on the other hand, has spent the better part of the past three months defending itself against these allegations. According to the company, its accounting practices are in compliance with Chinese regulations and China Development Bank remains committed to funding the remaining $445 million needed to fund CEO Yang and private-equity investor Abax Global's buyout offer at $24 per share.

With fresh allegations accusing Harbin of stealing money from shareholders coming out in a blog yesterday, the question has to be asked: Who's right?

Although this is a very difficult situation, and I'd just as soon avoid it altogether, I'm inclined to side with Harbin Electric. Even with the multiplicity of reverse merger frauds that we've witnessed over the past year including Rino International, Puda Coal, and Jiangbo Pharmaceuticals, new regulations and SEC intervention have drastically reduced the amount of fraudulent activity of late. Each side clearly has the their own best interests in mind, but it's evident that Citron and bloggers will resort to any means necessary to strike fear into the stock -- especially given that the former is currently selling shares of Harbin Electric short. While entitled to their opinion, Citron's research often borders on extremes which play on the investor psyche rather than sound judgment.

As of now, there is the potential for a serious arbitrage opportunity if this deal does indeed go through. Based on the $24 buyout offer from CEO Yang and yesterday's closing price of $17.45, traders could be privy to a 38% premium. One possible way to bet on this buyout is to consider options. Options would give you some downside protection just in case the deal falls through or Citron releases yet another damaging report. While Harbin's options aren't cheap by any means, purchasing downside put protection while also owning the stock could be a bet that pays off regardless of which side wins.

Who do you think will come out on top: Citron Research or CEO Yang? Share your thoughts in the comments section below and consider tracking Harbin Electric by adding it to your watchlist.

Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong.Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat won't bite your ear off.

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