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goldminingXpert (28.84)

How to spot a fraud from a value play



February 03, 2011 – Comments (40) | RELATED TICKERS: CCME.DL , CHBT.DL , SA

Interesting discussion going on over on another CAPS blog ( in the wake of the recent cratering Chinese phantom-company stocks. As CCME, CHBT, RINO, CVVT and others flutter toward zero, it's worth examining what we can and can't know as small investors. I am pretty useless when it comes to Chinese stocks, as I don't know any Mandarin or Cantonese, and their businesses are far too opaque to be understood without being their and speaking their language. I occasionally recommend Chinese stocks when I have some reason to believe they are somewhat credible (analyst coverage, news coverage in Western media, verifible deals with Western firms, etc.) However, in most cases, there simply isn't enough information for uninformed American dupes such as ourselves to figure out whether the company's are taking our investment dollars and buying luxury homes in California with them (Hello, RINO International).

Here's my thoughts (specifically about CCME, which dropped 33% today as it was clearly revealed to be a probable fraud):

After you've analyzed enough companies, you start to realize what is normal and what just can't make sense. Why should CCME trade at such a low valuation compared to the real Chinese advertising firms such as Focus or Vision China? Why don't analysts cover CCME when lots of analysts cover their smaller competitors? If the company were real, the real professional investors would be interested in it. Just like SeaBridge, the fake gold company in Canada that claims to have a huge deposit but can't get a single reputable analyst to discuss it.

They real way to succeed at value investing is to find companies who are followed but disliked by the analyst community along with a catalyst they are missing. I started my long and successful campaign pushing Western Refining at 6 bucks because I saw potential while the analysts were screaming bankruptcy. (there was in fact a "$0.00" price target on WNR from one analyst when I said it was a screaming buy.) The reason WNR was a good deal was not because it is was an obscure company no one had heard of, but rather because it was a company that everyone thought was dead. I analyzed their business and debt and said, well, the analysts are wrong. Now WNR is at $14.

But in CCME (and many of these phantom Chinese NYSE-listed tout jobs), the numbers are so good because they are entirely fictional. No one audits them, no one calls their alleged customers, no one visits their "factories," no one can even speak Chinese who pumps these stocks. When an actual researcher visits (hello Citron), they find a fiasco and tell people the company is a fraud. Stock collapses, as it should. Short way to avoid danger -- don't buy stock in tiny companies who are ignored by analysts.

40 Comments – Post Your Own

#1) On February 03, 2011 at 9:23 PM, JaysRage (77.46) wrote:

You mean real professional investors like Starr International, Goldman Sachs that have CCME as part of their holdings?     You have absolutely no idea what you are talking about.   CCME is an advertising company, audited by Deloitte.   They have no factories because they aren't a manufacturer.     You have four errors in your analysis and you only wrote one paragraph.   Try some due diligence before you shoot your mouth off. 

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#2) On February 03, 2011 at 9:30 PM, goldminingXpert (28.84) wrote:

Let's keep the discussion in general, rather than about specific companys. Thanks.

In regards to your specious blather, JaysRage, you do know that A) institutions buy small stakes in lots of stuff without much research... it's called an index fund ... B) When I said factories, I was speaking generally ... while CCME hasn't lied about factories, as ONP or RINO did, CCME lies about their busses, which are their "factories" i.e. the place cash is made, and yes, I know they have an auditor. But if you had read what I've written, you'd see why I discount their auditor. In effect, none of the Chinese firms are truly audited presently -- the SEC doesn't enforce laws effectively, as we all know.

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#3) On February 03, 2011 at 9:30 PM, HarryCaraysGhost (64.03) wrote:

Nice GMX,

I learned this lesson the hard way, you did'nt mention NEP, and HEAT. But that was my trifecta of doom on Chinese small caps.

What I've taken away from this is if something seems to good to be true it probably is.

And since I can't get reliable information out of China best to stay away.

I used the speculative part of my port for this but it's still painful. Some of my penny stocks have went up quite a bit, while the China plays dragged me down.

Oh well live and learn.

(And here's hoping we both make the playoffs next year)


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#4) On February 03, 2011 at 9:39 PM, goldminingXpert (28.84) wrote:

Never heard of HEAT. Funny you should mention NEP, as one of NEP's board of directors turned up at CAGC, another likely fraud that dropped 10% today and is rapidly heading toward 0.

That's another good sign of fraud, check out who is on the board of directors. Google them to see what else they've been involved with. My favorite joke company, RPRX (Repros, formerly Zonagen) has a load of people with experience in failing businesses across the globe...

Here's my old report on RPRX for a refresher ... . Since then, it fell from a pre-split adjusted 48 to, uh, 2.55 today.

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#5) On February 03, 2011 at 10:05 PM, zCreator (94.10) wrote:

+1 rec

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#6) On February 03, 2011 at 10:37 PM, JaysRage (77.46) wrote:

I'd prefer to talk about the individual companies, since you went through the trouble to point out specific ones, and since your blog post is about how to differentiate value from fraud.....especially since I've done a good bit of due diligence on CCME and I'm still convinced it's legit.   

Cash is hard to fake.   If Deloitte can't figure out if $170 million dollars of cash is real or not, then they deserve to lose their big-4 status.   On top of that, CCME has large FCF.  If CCME puts a number to the dividend that is pending, that is end game for the shorts.    No fraud that I've ever heard of gives away cash. 

Starr spent 4 months on the ground investigatng CCME, and they have a substantial position that they added to in October, and they have a consultant on the board of directors. 

Citron didn't do a shred of their own research.   They pieced together several very old weak pieces of information that aren't even correct in many cases.    The biggest eye-raiser in their article was their calling out of Northern Securities, who went ahead and re-affirmed their analysis of CCME and it's top-pick status.  

CAGC -- Wouldn't touch it with a ten foot pole.

CHBT -- Wouldn't touch it with a ten foot pole.

NEP -- Same thing.   Not gonna go there.   

Piling on CCME when it dropped substantially may seem like it fits in this basket, but I won't follow you on that one.    The evidence is way too much on the positive side on that one.  

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#7) On February 03, 2011 at 11:06 PM, Momentum21 (98.08) wrote:

GMX - with all due respect there is a big difference between fraud and being buried beneath a mound of debt in an unprofitable sector. WNR was the beneficiary of the jaws of crack spread life. I hope you made some good coin there you should for taking that crazy bet. : )

China is an easy short target right now because everyone has gobbled up the BS about this undeniable parabolic growth trajectory. We all want to own the new, new thing coming out of China. I own one of the most over-hyped, overly diluted pieces of garbage called CSR. I will be first to admit I fell for the big brother, its great to own "surveillance" in a communist country, the government will pump it full of dinero so they can track every move of the billion or so people who are plotting revolution nonsense...they basically sell alarms and as you can see by taking a look at Protection One, Brinks, etc that business is really not in favor.

What's the difference between CCME and the garbage being shopped in biotech that gobbles up investor dollars like real estate in Riverside County? IT is really not much safer to invest in the wild west of microcaps where you lose everything if 2 loans go belly up because some folks got to heavy drinking. 

I don't know. China is what it is...I still think the bigger danger is investing in "sure things" and not getting paid for your risk. 

I am not willing to bet on it yet but I think Citron is throwing a hail mary here...CCME is not dead to me yet.

Full Disclosure: I am also holding DJSP at a 69% loss out of a sense of pride.  

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#8) On February 03, 2011 at 11:35 PM, goldminingXpert (28.84) wrote:

Precisely the point of the difference between WNR and these Chinese "value" plays. The true value is found in companies that are left for dead, not ones that no one has heard of, such as the Chinese names.

To Jays 2nd comment (thanks for a much more well-thought out comment this time), I'd have to say, not so fast about cash/dividends being a be all and end all mark of non-fraud. I'd point out the example of Allied Capital (a stock I red-thumbed roughly 15 zillion times) as a company paying an absurdly high dividend to try to kill the shorts, but they still failed, as Einhorn documents in Fooling Some People All The Time.

Generally, however, cash, unlike dividends, can be trusted. You'll note, in Muddy Waters' research, they do value the cash the companies that they profile have fully. Cash is not usually faked. However, CCME only has $4.96 a share of cash. Seeing as how they are probably lying about their plans for a dividend, just as they are probably lying about their buses and their profit margins, it is unlikely the business is worth much. However, the cash is probably worth at least $3 or $4 a share (expect management to skim a bit of it before the company is delisted), so if I were short, I'd certainly cover once the stock approached $5.

My favorite Chinese name now is ACTS, which has $3 a share in cash and which I picked up at $1.80. Sure, I think their business is probably worth $0, but even so, the stock should be worth $3.

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#9) On February 03, 2011 at 11:42 PM, awallejr (39.10) wrote:

Well I do have concerns about trusting numbers on Chinese companies.  Ultralong blogged about a Chinese pharma company awhile back where on the face of the numbers it looked like a screaming buy, but who can really trust those foreign numbers.  I keep eyeing CGA and want to buy mainly because it is also the the right type of company in the right sector, but their numbers are being questioned and hence depressing the stock.

I don't know much about CCME aside from the fact that they sell advertising on buses.  Doesn't sound appealing to me personally since a utility company would seem a safer more solid play.


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#10) On February 03, 2011 at 11:54 PM, btown819 (91.91) wrote:

Have you looked at the differences between Chinese companies that have gone public through reverse-mergers vs. IPOs?  I would assume that a Chinese company going through an IPO would use the services of an investment bank and would generate a lot of business for Wall Street.  I don't think the same is true for reverse-mergers... Maybe if you don't pay the toll, you don't get protection from short sellers?  Just an idea... Also, I am sure there are lots of fraudulent Chinese companies out there, but I am also confident there are some gems hidden in the rubble.  The real challenge is being able to sort them out. 

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#11) On February 04, 2011 at 12:10 AM, Valyooo (33.93) wrote:

Jay, I said this in my blog, but they are not audited by a top 4 auditor.  They are audited by an asian accounting firm that pays deloitte to use their name.  And if you listened to the last conference call, the CEO avoided dividend talk at all costs.

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#12) On February 04, 2011 at 12:27 AM, Momentum21 (98.08) wrote:

Sure, I think their business is probably worth $0, but even so, the stock should be worth $3.


Where do you think that cash is going to go?? A special dividend for loyal investors... : )

See theGIGM chart 

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#13) On February 04, 2011 at 12:28 AM, btown819 (91.91) wrote:

That is standard practice for a lot of Big 4 in other countries around the world... interpret it however you'd like.

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#14) On February 04, 2011 at 12:46 AM, goldminingXpert (28.84) wrote:

Momentum, I don't know anything about Gigamedia. I said what I said regarding ACTS as the company's EPS has been roughly $0.00, give or take a few pennies, for the past couple years, but the cash balance has inched up slightly. No earnings creates a no-value business, other than a small valuation in case the low-end MP3 player chip-market turns up (haha). The stock is starting to follow the cash balance though... I'm up 25% from my entry. If the stock starts trading poorly or earnings go negative, I'll leave.

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#15) On February 04, 2011 at 1:14 AM, Option1307 (30.51) wrote:

Glad to see you blogging again, +1!

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#16) On February 04, 2011 at 1:34 AM, Mstinterestinman (< 20) wrote:

I would rather buy a China or India index fund I have no problem analyzing an American company but securities fraud is alot more difficult here. Although if you a Penny Stock its still possible ;)

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#17) On February 04, 2011 at 2:37 AM, DragontoadX (< 20) wrote:

I'm glad to see such unenlightened analysis of CCME from you GMX.  You should short it. You clearly know more than everyone else.  Me, well, I've only been researching this company for a year, so I don't know as much as you do.  I've never viseted their advertisement "factories" like Citron apparently has, so I'm clearly going to lose my shirt when I move 100% of my investment portfolio into this company tomorrow.

 Keep up the good work. :) 

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#18) On February 04, 2011 at 2:56 AM, goldminingXpert (28.84) wrote:

What's CAPS without its dunces? Nice to see you checking in Dragon.

I have no position in CCME, and no intention to take one.

I know just as much about this company as you do from my own research: nothing. Except that I am capable of reading other people's damning reports, which you either are not, or choose not to do.

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#19) On February 04, 2011 at 3:10 AM, dag154 (42.73) wrote:

Living in Greece, I have first hand experience in seeing auditors and auditing firms being bribed in order to sign off dubious accounts.

I am absolutely certain that the same thing happens in China.

People are free to gamble (though you might as well do so in Vegas -it is more patriotic) and who knows, you might win.  

Just don't call it investing.

GMX good article. 


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#20) On February 04, 2011 at 3:13 AM, goldminingXpert (28.84) wrote:

thanks, dag.

Arthur Andersen was getting bribed to take part in fraud of its clients.

And the "Deloitte" auditing CCME isn't the US one. It is a Chinese company paying the American company to use its name. The American, i.e. real, auditor takes ZERO responsibility for the results of the Chinese auditor using its name. Should be illegal if you ask me.

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#21) On February 04, 2011 at 3:51 AM, Mstinterestinman (< 20) wrote:

I don't get why an American Company wants to do sell its name like that at least imo it wouldn't be worth the brand damage.

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#22) On February 04, 2011 at 9:37 AM, silverminer (29.91) wrote:

Nice to see you blogging, GMX. :)

For a second, I thought this might be another Rosetta Stone rant, so I was relieved to find otherwise. :P

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#23) On February 04, 2011 at 9:58 AM, GraemesPSP (99.69) wrote:

Interestingly I was actually long on CCME, for a few days at least.  When it went up by 10% on no news last friday I had a look at the yahoo message board and my inner instincts started screaming pump & dump.  So I sold about half and then sold the rest at the beginning of this week when the first citron report came out.  Got lucky and probably even made a profit on this POS.  I'm curious about the Koza connection, he's quite impresses me as an investor and he's still standing by this company.  Well, we'll see.

 Anyway, good article.

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#24) On February 04, 2011 at 10:04 AM, silverminer (29.91) wrote:

I just saw your Seabridge reference. Do you have any evidence to support your claim that SA is a fraud? If so, I would certainly like to see it.

As it turned out, your perrennial favorite miner -- Jaguar Mining -- appears to have been the greatest disappointment in the industry. One of their producing mines just upped and disappeared from their website entirely. Poof! That's always a nice touch.

I'm not trying to roast you Ricky Gervais-style. I'm just disappointed that you would declare a company a fraud without offering a shred of evidence to back up your claim. I don't even own SA, but I have an interest in ensuring that those who may hold the shares are properly informed.

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#25) On February 04, 2011 at 10:12 AM, rexlove (99.73) wrote:

Check this out: 

Hmmm - I wonder who was taking on all those put options on CCME the day before they released their report? Those guys from Muddy Waters made a killing.

Anybody want to team up and form an investment research firm? We could fly out to China - bash on a bunch of Chinese companies and come back millionaires.  

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#26) On February 04, 2011 at 11:59 AM, goldminingXpert (28.84) wrote:

Silverminer: Yes, the JAG story has turned more negative. I wrote this in August of last year: "Management has failed us several quarters in a row now and as such, trusting it completely is no longer a good idea." While perhaps I should have been more negative, I haven't been promoting them for quite a long time.

My thoughts on SA can be found in my pitch on it, the Barrons article that came out at the same time, or the Citron piece published three days after mine that restated my pitch more eloquently. Basically, a company with no proven reserves, no analyst coverage, and an unbelieveable story doesn't pass the sniff test. If they had a genuine exploitable mine, they'd have partners, permits, and fawning analysts.

Rexlove: I have no interest in bashing companies -- however, if you wish to expose fraud with them, that'd be fine.

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#27) On February 04, 2011 at 12:04 PM, goldminingXpert (28.84) wrote:

Which producing mine disappeared Silverminer? I see that Sabara isn't on the dropdown menu, but it is still on their site:

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#28) On February 04, 2011 at 12:19 PM, lctycoon (< 20) wrote:

Here's another analysis of CCME that reveals it to be quite probably legitimate:

I agree with you, though.  Not on any specific companies, but that it can be incredibly difficult for individual investors to determine legitimacy of any microcap stocks, let alone ones in a nation that still does not have good corporate governance or investor protection.

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#29) On February 04, 2011 at 12:34 PM, TMFBabo (100.00) wrote:

The sniff test is a good one, but I recommend reading Financial Shenanigans, Quality of Earnings, and Creative Cash Flow Reporting to learn how to spot red flags in financial statements.

There are plenty of examples of red flags one could spot after reading the above books:

1. WorldCom capitalizing instead of expensing their line costs when the line costs should clearly have fallen under cost of goods sold.  FCF was wildly negative even though they reported "earnings"

2. Inventory or accounts receivable rising faster than sales: business slowdown, anyone? In cases where inventory is indeed rising faster than sales, are finished goods rising way faster than raw materials? Another possible sign of deterioration since they may have finished goods sitting around, which means they also wasted time, labor, depreciation, etc.

3. Letting accounts payable balloon when you supposedly have cash on your balance sheet: you're manipulating CFFO, or worse, fraudulent and don't even have the cash.

4. Percentage of completion contracts and anything that requires management "estimates": potential for aggressive revenue recognition (pulling forward sales from future periods)

5. Companies creating reserve accounts when acquiring other companies, announcing restructuring charges, whatever: they can then use these reserve accounts to bolster earnings selectively (also called cookie jar reserves)

6. Accounting change announcing a lengthening of useful lives for equipment: HUGE red flag

7. AOL amortizing subscriber costs instead of expensing them, and then lengthening the amortization schedule later on: double red flag

The list is endless - I could spend a few hours listing every example, but I won't.

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#30) On February 04, 2011 at 12:35 PM, mdpagnotta (54.11) wrote:

I saw someone mentioned something about HEAT very curious to hear some thoughts on HEAT as it is valued so low and seems to be a good business....could it be a fraud worry that makes it priced so low? Im fairly sure a few analysts cover HEAT but not positive. Comments would be appreciated because I think many chinese small caps have gotten beaten down because of their counterparts who are fradulent. This could be a great buying opportunity if youre able to pick out the ones that got dragged down that shouldnt have...

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#31) On February 04, 2011 at 3:04 PM, silverminer (29.91) wrote:


Jaguar pretty much flipped all of us the bird last year, but the Sabara affair was particularly pitiful. They struck a quarter-million ounces of gold from the resource statement without so much as a press release! They closed a mine with no more communication than a removed menu item on their website. That has to go down as one of the worst abuses of shareholders I've seen in recent years ... and I've seen some pretty severe abuses.

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#32) On February 04, 2011 at 9:57 PM, gt1135 (79.62) wrote:

I owned a small position, purchased in Dec on CCME.  Doubled my position yesterday when it was down around $11.  Nothing like a quick 20% gain in a day to even things out.

I'm not going to tell you that every statement the company has made it 100% accurate. I don't think many companies make 100% accurate statements.  I do however think that these 2 reports are 90% full of you know what.  Hmmm, two reports released during the Chines new year, which last like a week and is a very important holiday over there (and for Chinese Americans as well).


The timing is way too suspicious on this one.  I say buy CCME...but be smart and don't put all your eggs in one basket. 

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#33) On February 04, 2011 at 10:02 PM, goldminingXpert (28.84) wrote:

Silverminer ... could you give a little more detail on Sabara? It is, in fact, still on their website. It was never a large producing mine, and I valued it at little more than a dollar per share when analyzing the company back in '08. The Website still claims it should average 20,000/oz a year through 2013 though honestly they've got bigger issues, particularly not keeping costs under control.

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#34) On February 07, 2011 at 9:27 AM, silverminer (29.91) wrote:


Sabara is gone and defunct. They ceased operations without so much as a press release, and the link you keep referencing is a ghost link from their website that is no longer a navigable target. The property's resources were deleted from their resource statement, again without any meaningful communication to shareholders of same.

How could the company face bigger issues than their brazen attempt to make a producing mine just disappear quietly.

Given your own cautious stance against diceptive/fraudulent activities, I would think this would trigger your defenses in a massive way. 

JAG management is, in my opinion, the worst of the worst! Not to be trusted.

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#35) On February 07, 2011 at 9:29 AM, goldminingXpert (28.84) wrote:

"Sabara is gone and defunct. They ceased operations without so much as a press release, and the link you keep referencing is a ghost link from their website that is no longer a navigable target."

Help me understand this. The Sabara mine still shows up on google search and leads to that page, which still loads from their website. What's a ghost link?

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#36) On February 07, 2011 at 10:17 AM, 100ozRound (28.70) wrote:

Jaguar removed the link from the navigation on their site but they didn't remove the actual page. The google spiders can still see it when they crawl.  You would have to know the exact address to be able to access it and google gives that to you.  Now I'm not sure why they would remove the link and not the page itself.

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#37) On February 07, 2011 at 10:23 AM, goldminingXpert (28.84) wrote:


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#38) On February 09, 2011 at 4:16 PM, silverminer (29.91) wrote:


I find that many websites contain what I would term "ghost links"... pages that are not specifically shielded from view, but were intended to be cut simply by removing the navigability to the page within the website. The company might not expect you to find the page, but as 100oz pointed out, in many cases you still can.

They struck Sabara entirely. And they tried to do it in such a way that few might notice. Are you pissed yet?

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#39) On February 09, 2011 at 4:35 PM, goldminingXpert (28.84) wrote:

I e-mailed IR and asked them what's going on with Sabará. I'll follow up when they respond.

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#40) On February 25, 2011 at 1:40 AM, mhy729 (30.48) wrote:


Have you heard back from the JAG folks yet?

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