Saturday, November 18, 2017
Business

China company accused of fleecing investors of $7.6 billion

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BEIJING — Police arrested the maverick founder of China's largest online finance business on suspicion of fleecing 900,000 investors of $7.6 billion, in what could be the biggest financial fraud in Chinese history.

State media outlets reported the arrest of Ding Ning and 20 of his employees late Sunday. State broadcaster CCTV aired purported confessions from two former employees at Ezubao, an Anhui Province outfit that rose from obscurity to become China's largest online financing platform in about 18 months.

Ezubao was the most spectacular player in a booming online investment industry that Chinese authorities have been struggling to regulate. Firms ranging from established Internet companies such as Alibaba to virtually unknown upstarts have flooded into the business, promising higher returns than those at state-run banks, which often offer interest rates below inflation.

Ezubao promised investors that borrowers would pay back loans at interest rates between 9 and 14.6 percent, but 95 percent of those borrowers were fictional entities created by Ezubao, a former company executive told investigators.

Behind the firm's rise was 34-year-old Ding Ning, an Anhui native who dropped out of school at 17 to work at his mother's hardware factory, where he first gained experience running online sales, according to media reports.

With no technical or financial training, Ding launched Ezubao in July 2014 and opened multiple marketing offices across China. The venture bought expensive ad spots that aired just before the widely viewed nightly CCTV newscast, the state broadcaster's flagship program. Ezubao appeared to gain Beijing's imprimatur when the gov.cn government website published an interview with Ding in July discussing his life as an entrepreneur. The interview has since been removed from the site.

State media took a far different tone Sunday as CCTV aired Ding's confession and footage of officials hauling away bags of cash from his home. The Xinhua news agency detailed Ding's extravagant lifestyle and the gifts he lavished on a business partner, Zhang Min, including a $20 million villa in Singapore and a $1.8 million pink diamond ring.

"The truth is that it's a fraud … it's a typical Ponzi scheme," Zhang, the associate, said in her aired confession.

Despite the vast sums cited in the case, Ezubao, which also went by Ezubo on its website, represented just a sliver of China's shadow banking industry estimated to be worth $1.5 trillion as of the end of June, according to Chinese banking regulators.

Fu Weigang, a researcher at the Shanghai Institute for Finance and Law, said difficulty obtaining financing in a state-dominated banking system has for decades driven Chinese citizens into underground borrowing and lending, which also gave rise to countless Ponzi schemes.

But Ezubao was able to take advantage of an influx of mom-and-pop investors in recent years using an Internet model, Fu said, effectively pushing small-scale scams to a countrywide level.

"What they were doing was nothing new in China," Fu said. "But how they were doing it online, and the scale, was unprecedented."

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