VIMC Investors Hold A Worthless Bag

VIMC Investors Hold a Worthless Bag
WWW.TRINITYRESEARCHGROUP.COM
DECEMBER 8, 2014
VIMC INVESTORS HOLD A WORTHLESS BAG
DECEMBER 8, 2014
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PAGE 2 / 37
DECEMBER 8, 2014
TABLE OF CONTENTS
Disclaimer ....................................................................................................................................... 2
Executive Summary ........................................................................................................................ 4
List of Exhibits ................................................................................................................................ 5
Introduction ..................................................................................................................................... 6
The Government Giveth ............................................................................................................. 7
Government Corruption in the Chinese Technology Sector ..................................................... 7
Shanxi, a Hotbed of Political Corruption.................................................................................. 8
One of VIMCs Government Sugar Daddies Sacked ............................................................... 8
Hidden Assets ........................................................................................................................... 9
Insiders Taketh Away ................................................................................................................... 13
Its (Related) Party Time! ....................................................................................................... 13
EmbezzleCo ............................................................................................................................ 15
Step 1: Carve the Operating Value Out of the Business ......................................................... 17
Step 2: Relist the Valuable Operations Where US Investors Cant Find You........................ 20
Step 3: Pillage the Land .......................................................................................................... 22
Step 4: Bait and Switch US Investors ..................................................................................... 27
Pump and Dump ........................................................................................................................... 32
Conclusion .................................................................................................................................... 37
PAGE 3 / 37
DECEMBER 8, 2014
EXECUTIVE SUMMARY
SELL Target Price: $0
Ticker:
Last Close:
52 Week Range:
Market Cap (mn):
Nasdaq:VIMC
$6.41
$1.70 - 11.79
$160
FD ADS Outstanding (mn):

Free Float (mn):
Ave. Daily Volume (ADS):
Short Interest (mn):
23.8
15.025
669,000
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.
PAGE 4 / 37
DECEMBER 8, 2014
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)
26: USD Value of Insider Sales, 2008-Q3 2014 (Page 36)
PAGE 5 / 37
DECEMBER 8, 2014
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.
http://thediplomat.com/2014/07/in-zhou-yongkang-xi-bags-the-ultimate-tiger/
PAGE 6 / 37
DECEMBER 8, 2014
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
http://zqb.cyol.com/html/2013-10/31/nw.D110000zgqnb_20131031_1-06.htm
PAGE 7 / 37
DECEMBER 8, 2014
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:
http://www.china.org.cn/china/Off_the_Wire/2014-11/26/content_34160236.htm
http://english.caixin.com/2014-12-02/100758187.html
5 http://news.163.com/14/0417/11/9Q1HLMGH0001124J.html
4
PAGE 8 / 37
DECEMBER 8, 2014
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
7
http://www.ymysw.cn/List.asp?ID=7011
http://m.blogchina.com/blog/view/uname/zhenhepeng/bid/2235158
PAGE 9 / 37
DECEMBER 8, 2014
Exhibit 1: VIMCs Major Dealings with the Government8

Date
Event
Government
entities
Terms
Ratioale
Shenzhen City
6/26/2007
Shanghai City
11/15/2007
Acqusition of land
use rights
Acquisition of land
use rights
Jiangsu Province
12/26/2007 and
2010-2012
2007: Acquisition of
land use rights
2010-2012: receipt of
RMB 42 million
($6.69M) in cash
Tianjin City
12/29/2008
Shanxi Province
September 2013
Qingdao City
2013
Formation of
Zhongtianxin, a JV
with the government,
and receipt of RMB 98
million ($14.5M) in
cash
Shanxi Guoxin
Investment (Group)
Corporation, a
financial holding
group associated with
the Shanxi
government
Receipt of
government grant in
cash. VIMC is one of
five companies to
receive total of RMB
280 million ($45.5M)
City of Qingdao
Formation of Vimicro
Tianjin, a JV with the
government, and
receipt of RMB 250
million ($36.6M) in
cash
Shenzhen Municipal Zhangjian
Administrative
State-owned Asset
Bureau of Land
Semiconductor
Committee of Nanjing Management
Resources and
Industry Park Co. Ltd. Xuzhuang Software
Corporation of Tianjin
Housing Management (state-owned entity) Industry Base and
Economic-Technical
Nanjing Xuanwu
Development Area
District Management ("Tinajin SAMC")
and Investment of
State-Owned Asset
Holdings (Group) Co.
Ltd.
3,947 square meters
20,900 square meters 80,000 sqare meters
VIMC and the
for $0.9 million
for $5.7 million
for $5.4 million
government each own
49.99% of the JV, cofounders' private
company owns 0.02%
VIMC and the

None
government each own
49% of the JV, cofounders' private
company owns 2%
Corporate use only

Corporate use only
Corporate use only
Design, manufacture
(VIMC office building) (VIMC office building) (VIMC office building) 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 governmentbaked 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.
Source: 2010 20-F, 2010-2012 SAIC Filings, Qingdao City government website
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
9
PAGE 10 / 37
DECEMBER 8, 2014
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
Vimicro
International
Corporation
(Cayman Islands)
100%
Vimicro Wuxi
(PRC)
100%
Vimicro
Hong Kong
(HK)
100%
Viewtel
(USA)
100%
Vimicro
Beijing
(PRC)
Vimicro China
(PRC)
Vimicro Shanghai
(PRC)
100%
Vimicro
Fuzhou
(PRC)
100%
100%
100%
100%
Vimicro
Guangdong
(PRC)
50.95%
Vimicro
Sky-Vision
(PRC)
100%
Vimicro
Jiangsu
(PRC)
Vimicro Shenzhen
(PRC)
49.9%
Vimicro
Tianjin
(PRC)
51%
Zhongtianxin
(PRC)
(VIE)
Vimicro
Sky-Vision
(PRC)
100%
Vimicro
Guiyang
(PRC)
Denotes beneficiaries of dealings with government
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
PAGE 11 / 37
DECEMBER 8, 2014
Exhibit 3: Current VIMC Organizational Chart12

Vimicro
International
Corporation
(Cayman Islands)
100%
Vimicro China
(PRC)
100%
100%
Vimicro
Hong Kong
(HK)
Viewtel
(USA)
100%
Vimicro
Beijing
(PRC)
100%
Vimicro
Jiangsu
(PRC)
100%
Vimicro
Fuzhou
(PRC)
100%
Vimicro
Guangdong
(PRC)
49.9%
Vimicro
Tianjin
(PRC)
51%
Zhongtianxin
(PRC)
(VIE)
Vimicro
Sky-Vision
(PRC)
100%
Vimicro
Guiyang
(PRC)
To state the obvious, Exhibits 2 and 3 are not the same. Where did all the government aid go??
12
Source: 2013 20-F
PAGE 12 / 37
DECEMBER 8, 2014
INSIDERS TAKETH AWAY

Its (Related) Party Time!
VIMCs 20-F annual reports are chock full of potential conflicts of interest and governancerelated 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
Tianjin SAMC
Ningbo Sunny Opotech Co. Ltd
Vimicro Wuxi
VMF Consulting Company
Vimicro Qingdao
Zhongtianxin
Visiondigi
Vimicro Tianshi
Vimicro Xingguang
Individual shareholders of Visiondigi
Relationship with the Group

Non-controlling shareholder of Vimicro Tianjin
Non-controlling shareholder of Visiondigi
Owned by certain executives of the Company
18% equity investee of the Company
51% equity investee of the Company
12.03% equity investee of the Company
Non-controlling shareholders of Visiondigi
And below are the corresponding disclosed related party transactions since 2010.
PAGE 13 / 37
DECEMBER 8, 2014
Exhibit 5: Related Party Transactions Disclosed in 2010-2013 20-F Filings

Unit: USD thousands
Transactions
Sales of Goods:
Vimicro Wuxi
Vimicro Qingdao
Zhongtianxin
Tinanjin SAMC
For the Year Ended December 31,

2009
2010
2011
2012
2013
329
2,764
-
72
4,193
-
333
523
21,308
828
Total
3,093
4,265
856
22,136
Purchase of Inventories:
Zhongtianxin
391
64
-
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 Parties

Vimicro Wuxi
6,795
Proceeds from Disposal of Assets in Discotinued Operation

VMF Consulting
1,734
Proceeds from Disposal of Assets in Discotinued Operation

Vimicro Wuxi
4,955
Balances
Amounts Due from Related Parties:
Vimicro Tianshi
Vimicro Qingdao
VMF Consulting Company
Vimicro Wuxi
Tianjin SAMC
Visiondigi
Individual Shareholders of Visiondingli
Zhongtianxin
1,651
8,751
59
2
2
-
4,257
477
97
-
3,200
430
2
422
64
107
5,000
77
450
33
885
19,375
Total
10,465
4,831
4,225
25,820
Amounts Due to Related Parties:

Vimicro Wuxi
Individual Shareholders of Visiondingli
Zhongtianxin
4,532
145
171
-
676
287
513
1,671
204
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
PAGE 14 / 37
DECEMBER 8, 2014
embezzled by Co-Founders and their complicit insiders. The various Vimicros marked in the 20Fs 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.
PAGE 15 / 37
DECEMBER 8, 2014
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
VIMC
(public company
owned by US
investors)
PRC Government
Jiangsu Province
Shanghai City
Shenzhen City
Qingdao City
Funding
Land
Vimicro Wuxi
Vimicro Shanghai
Land
Vimicro Shenzhen
Most
Valuable
Businesses
+
Land
+
Funding
EmbezzleCo
(private company
owned by insiders)
Funding
Vimicro Qingdao
Exhibit 7 (below) lists all major disposals of VIMC subsidiaries.
PAGE 16 / 37
DECEMBER 8, 2014
Exhibit 7: VIMCs Major Disposals, 2010-2013

Date
Entity Disposed
Dec-2010 Vimicro Wuxi
Dec-2011 Vimicro Qingdao
Dec-2012 Vimicro Shanghai
Apr-2013 Vmicro Shenzhen
TBD
Vimicro Jiangsu
Description (from 2013 20-F)

Conducts R&D of RF chips and related
businesses. Consolidated VIMC's analog IC,
MP4, advanced multimedia and bluetooth
businesses
Mobile phone multiprocessor business
Counterpary
EmbezzleCo (VMF Consulting
Company)
EmbezzleCo (VMF Consulting

Company) and "two former key
employees"
EmbezzleCo (thorugh Vimicro
Holds land use rights to a parcel of
undeveloped land originally planned for non- Xingguan, an affiliate of VMF
Consulting Company)
core IC business use. No significant
operations
Holds "in-substance" amount of real estate. EmbezzleCo (thorugh Vimicro
No significant operations
Tianxi, an affiliate of VMF
Consulting Company)
TBD (intended to be EmbezzleCo)
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
Net Consideration
$1.4 million
Rationale for Disposal (from 2013 20-F)

Unprofitabe non-core business
$2.9 million
Unprofitable, not part of focus, wanted

to streamline cost structure
$10.4 million
To divest land rights
$10 million
To divest real estate
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 lossmaking 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
Revenue
Net profit
Total Assets
Government Subsidies
2010
2011
2012
RMB
USD
5.10
0.75
0.46
0.07
RMB
USD
41.00
6.34
27.00
4.18
RMB
USD
75.70
12.00
35.50
5.63
93.50
-
13.82
-
125.80
17.00
19.46
2.63
184.00
25.60
29.16
4.06
PAGE 17 / 37
DECEMBER 8, 2014
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
PAGE 18 / 37
DECEMBER 8, 2014
Exhibit 11: Vimicro 2012 Wuxis Financials Filed with the SAIC
Income Statement
Balance Sheet
PAGE 19 / 37
DECEMBER 8, 2014
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 20 / 37
DECEMBER 8, 2014
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 21 / 37
DECEMBER 8, 2014
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
PAGE 22 / 37
DECEMBER 8, 2014
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 23 / 37
DECEMBER 8, 2014
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 24 / 37
DECEMBER 8, 2014
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 25 / 37
DECEMBER 8, 2014
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
16
http://land.fang.com/financing/177256.html
http://zhangjiangruanjianyuan.fang.com/
PAGE 26 / 37
DECEMBER 8, 2014
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 CoFounders 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
18
Source: 2013 20-F, page 30

Source: 2013 20-F, page 32
PAGE 27 / 37
DECEMBER 8, 2014
Exhibit 17: VIMCs Quarterly AR and Net Cash after Establishment of Zhongtianxin
Unit: USD thousands
Revenue
FY2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014

71,187
7,854
11,091
24,153
21,425
16,408
24,033
27,600
Accounts and Notes Receivable, Net of Provision

Amounts Due from Related Parties, Net of Provision
Total
24,564
4,225
28,789
Sequential Increase/(Decrease) in AR from Related Parties, Net of Provision

% of Revenue
Cash and cash equivalents
Long-term bank loans and liabilities
Net Cash
55,532
4,800
50,732
19,807
4,016
23,823
23,792
5,497
29,289
24,543
13,978
38,521
24,996
25,820
50,816
23,038
34,879
57,917
18,767
40,093
58,860
25,453
64,542
89,995
(209)
N/A
1,481
13.4%
8,481
35.1%
11,842
55.3%
9,059
55.2%
5,214
21.7%
24,449
88.6%
48,070
17,500
30,570
31,942
21,000
10,942
31,014
21,200
9,814
35,869
23,900
11,969
23,423
26,000
(2,577)
22,445
29,200
(6,755)
27,585
29,900
(2,315)
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
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
(10,000)
FY2012
Q1 2013
Revenue
Q2 2013
Q3 2013
Q4 2013
Q1 2014
Q2 2014
Q3 2014
Sequential Increase/(Decrease) in AR from Related Parties, Net of Provision
Exhibit 19: VIMCs Net Cash Position, Q1 2013-Present

60,000
50,000
40,000
30,000
20,000
10,000
(10,000)
FY2012
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014
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.
PAGE 28 / 37
DECEMBER 8, 2014
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
21 Source: 2013 20-F, page F-3 of Exhibit 15.3
20
PAGE 29 / 37
DECEMBER 8, 2014
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 30 / 37
DECEMBER 8, 2014
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-andswitched 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 31 / 37
DECEMBER 8, 2014
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
PAGE 32 / 37
DECEMBER 8, 2014
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
PAGE 33 / 37
DECEMBER 8, 2014
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
26 http://phx.corporate-ir.net/phoenix.zhtml?c=194779&p=irol-newsArticle&ID=1883671
25
PAGE 34 / 37
DECEMBER 8, 2014
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?
PAGE 35 / 37
12/29/2008
9/10/2009
9/10/2009
9/21/2009
11/19/2009
8/18/2010
9/27/2010
9/28/2010
9/29/2010
9/30/2010
12/21/2010
12/22/2010
12/23/2010
12/28/2010
12/31/2010
12/12/2011
12/23/2011
12/6/2012
6/25/2013
8/27/2013
9/27/2013
6/16/2014
6/18/2014
6/20/2014
6/25/2014
6/30/2014
7/1/2014
7/3/2014
7/10/2014
7/15/2014
9/2/2014
9/3/2014
9/5/2014
9/8/2014
9/11/2014
9/12/2014
9/16/2014
9/19/2014
9/23/2014
9/24/2014
9/30/2014

DECEMBER 8, 2014
Exhibit 26: USD Value of Insider Sales, 2008-Q3 2014
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
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.
PAGE 36 / 37
DECEMBER 8, 2014
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.
PAGE 37 / 37

VIMC Investors Hold A Worthless Bag

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VIMC Investors Hold a Worthless Bag

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

FD ADS Outstanding (mn):

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

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

THE GOVERNMENT GIVETH

Source: China Youth Daily

VIMC INVESTORS HOLD A WORTHLESS BAG

Shanxi, a Hotbed of Political Corruption

One of VIMCs Government Sugar Daddies Sacked

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 1: VIMCs Major Dealings with the Government8

VIMC and the

Corporate use only

VIMC INVESTORS HOLD A WORTHLESS BAG

Denotes beneficiaries of dealings with government

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 3: Current VIMC Organizational Chart12

Source: 2013 20-F

VIMC INVESTORS HOLD A WORTHLESS BAG

INSIDERS TAKETH AWAY

Relationship with the Group

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 5: Related Party Transactions Disclosed in 2010-2013 20-F Filings

For the Year Ended December 31,

Technical Service Fee Rendered:

Technical Service Fee Rendered:

Loan from Related Parties:

Repayment of Loan from Related Parties

Proceeds from Disposal of Assets in Discotinued Operation

Proceeds from Disposal of Assets in Discotinued Operation

Amounts Due to Related Parties:

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

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

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 7: VIMCs Major Disposals, 2010-2013

Dec-2011 Vimicro Qingdao

Dec-2012 Vimicro Shanghai

Apr-2013 Vmicro Shenzhen

Description (from 2013 20-F)

EmbezzleCo (VMF Consulting

Rationale for Disposal (from 2013 20-F)

Unprofitable, not part of focus, wanted

To divest land rights

To divest real estate

To divest real estate

Step 1: Carve the Operating Value Out of the Business

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 9: Vimicro Wuxis 2010 Financials Filed with the SAIC

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

VIMC INVESTORS HOLD A WORTHLESS BAG

Step 3: Pillage the Land

VIMC INVESTORS HOLD A WORTHLESS BAG

Exhibit 14: Current Pictures of Vimicro Shanghais Real Estate Project

VIMC INVESTORS HOLD A WORTHLESS BAG