The Shell-Trading Life of a Bankrupt Millionaire: The argument for Fraud by Foreign-Listed domestic Firms (source: 21st Century Financial, Aug 31 2010)
Xu Jie is already 46 years old. After many years of keeping a low profile, this man with a name very common among Chinese males, assumed the name “Dr. Kit Tsui” across the Pacific. It is this man that controls the growth and decline of nearly 10 billion RMB in market cap in US-Listed Chinese stocks.
10 years ago, Xu was the owner of a Shenzhen-based wireless phone giant “Wandelai”. This company, which had the encouragement from the government to list on the GEM (Growth Enterprises Market )board, was once famous for its capital operations. But in 2003, the company went under because of a 600 million RMB debt case.
Xu Jie left for America, and kept a low-profile listing Chinese companies overseas. He became a promoter of RTO’s. But this low-profile “shell owner”was beginning to face a credibility crisis.
“These stock’s short term success has nearly nothing to do with individual investors” On Aug 26th, the well-known financial magazine Barron’s wrote. “There are many problems during the listing of Chinese RTO’s.”. USX China Index showed, from 2003 to now, there has been 349 Chinese companies listed in US thru RTO. But their market cap decreased by an average of 75% compared to 150 days after the RTO.
After we published the fraud investigation of Oriental Paper (ONP) in July (For details see our Jul 22nd report), our journalist received many accusation data from institutions and individual investors.
Being the organization that was behind ONP’s listing, Xu and his group began to show their presence. Our investigation shows, Xu and his “family-like” group were involved in the listing of nearly 10 companies. They helped Chinese firms buy shell companies, manufacture financial data, and use many off-shore companies to create a mirage of beautified financial results.
Listed companies which are in controversies due to Xu’s group include JADA, UTA, CHCG, CNOA, BFAR, and HSYT.
To millionaire Xu Jie, or today’s Kit Tsui, “Wandelai” is the tomb of all secrets.
Kit Tsui’s faint trace in the US capital markets mainly can be found in the documents of his 2003 OTCBB-listed company Industries International Inc (INDI).
In 2003 Feb, Kit Tsui, along with his brother Xu Zhiyong and brother-in-law Yu Weijiang, bought INDI.
Just before and after 2003, INDI’s Chinese subsidiary Wandelai Communication Technology Ltd, burdened with heavy debt, faced the threat of bankruptcy. According to a training material from Shenzhen Stock Exchange, from Wandelai’s founding in 1993 to 1998, the company had a leading position in China’s wireless phone market. But when Xu took over, he took advantage of the government’s certification of Wandelai as hi-tech company and its encouragement of GEM listing, to “encircle money” (translator’s note: “encircle money” is a term commonly used in Chinese to describe, mostly in capital markets, thru seemingly legitimate ways (i.e. gray areas in financial or legal system) to funnel other people’s money into one’s own pocket.)
The capital market captured Xu’s heart very early. In 1998 he became majority owner in ST Jinuoer, and the company’s bottom line went from red to black in only 1 year. However, few years later, the bankruptcy liquidation annoucement from Shenzhen Mid-Level Court was “As of 2004 Mar 31, Wandelai’s total debt was 610 million RMB, net book asset was 67.43 million RMB, actual loss was 543 million RMB.
At that point, Xu Jie’s “strategy” has revealed its flaws. In the early years he was employed in Hubei province’s Development and Planning Committee, specifically searching for many hi-tech projects for companies and obtaining accreditation from the government for these companies. Haitong Securities, Southwest Securities, and other institutions had reasons to provide him large amount of bridge loans; banks were also not alerted by his frequent debts.
Xu also attracted attention when he appointed well-known economists and legal experts to become independent board of directors in his company.
On the other hand, Wandelai’s core has been for a long time consisted of people from Xu’s network from his home-town - Huangshi city in Hubei province, and of his family members, among which the backbone of Xu Zhiyong, Yu Weijiang, etc are still in Wandelai’s board of directors even years after.
Not until 2004 when the liquidation begins did Xu’s American operation of INDI catch the public’s attention. Years before, he had many BVI companies under his name in order to trade shells in the US stock market.
“Before the bankruptcy, he went to the US, afterwards he travelled back and forth to take care of his investment business” a Wandelai-era high management told us.
Xu is in the US but his capital operating center is still in Shenzhen.
It is a company with the registered name “Shenzhen Huayin Guaranty Investment Ltd”.
The most updated info from Industrial and Commercial Bureau shows, the company’s registered capital was 100 million RMB, its legal representative is Xu Xiyou. From Oct 2009 until now, the legal representative changed 4 times. The prior legal representatives were Yu Guoqiong and Xu Zhiyong. Yu held the position for 4 years.
Although in the registered information Shenzhen Huayin’s shareholders constantly changed (mostly some off-shore companies), one OTCBB-listed company China Finance (CHFI) claims in its SEC filings that CHFI wholly owns Shenzhen Huayin.
CHFI, a US registered asset investment and management company, was a former shell with the name Kubla Khan, Inc. Xu’s group purchased it in 2004.
From 2003, according to our findings, there have been 12 Chinese companies which Xu’s group was involved in listing them on the US exchange. After the RTO, CHFI always had a certain percentage of shares – a reward for the success of the RTO.
The earliest board of directors of CHFI includes Xu Zhongnan, Wan Xuemei, Wang Zhongping, Xu Zuhong, etc. Wan Xuemei, Wang Zhongping and Xu Zuhong were mid-management during the Wandelai era. Xu Zuhong was even in Shenzhen Huayin’s board of supervisors for many years. In 2004 Nov, Xu Zhiyong became a shareholder in CHFI, afterwards, Yu Guoqiong (Ann Yu) also became CHFI shareholder thru her off-shore company China US Bridge Capital. She became a long-term CEO for CHFI afterwards.
We discovered that the websites of China US Bridge Capital, CHFI, and Shenzhen Huayin are extremely similar. Also, another company, China US Strategy Capital Group, was very similar to the above in their main clients, address, and contact info.
In reality, neither Shenzhen Huayin nor CHFI directly involves in shell trading. Nearly all of Xu group’s shell trading were thru off-shore companies. For example, thru Value Global and Top Interest.
In 2007 an off-shore company called Max Time Enterprise Ltd (MTE) purchased ONP’s predecessor, a shell company called Carz, Inc., then MTE sold it to the Chinese company Baoding Oriental Paper company Ltd.
Also, a construction company from Hangzhou, bought from MTE, shares of My Quote Zone Inc. (translator’s note: My Quote Zone Inc is assumed another shell owned by MTE), then changed its name to China 9D Construction Group (CNAG) and got listed. CHFI got 3.63% of CNAG shares from this deal.
JADA, BFAR, Sino-Bon Entertainment Inc. (former named Sunnyside Acres Mobile Estates), and HYST also got listed thru similar deals with MTE.
The stock price of some of these companies, after a short term burst upward, has been lingering at a low level. They will be facing more suspicions. “Xu Jie’s group, thru off-shore companies, manufactured some false financial projections and marketed them to institutional investors” A US hedge fund representative told us.
“This type of RTO model has existed for a long time, the key is institutional investors accept and approve these Chinese companies.”
According to the service brochure of Shenzhen Huayin, Xu Jie’s group does not charge any listing fees. The key to profiting for them is to lift the client’s stock price, then sell at high prices.
“Obviously this needs some kind of support from investment intermediary institutions and auditors.”A New York-based lawyer involved in ONP’s class action lawsuit said.
The cost for fraud is not high. SEC does not have the means to check the Chinese companies’ daily operation. US judiciary also cannot summon to court Chinese company representatives. “But if one case of fraud is successful, it’s enough money to spend for half your life.” said a Canadian-based hedge fund representative who has in the past reveal many fraud cases on the Web.
Back in 2004, Xu’s INDI had already caught the attention of the SEC. But this only prevented Xu’s name to appear in SEC’s record again. This did not slow down “the people beside him” to expand their investment.
“Some investment banks are funny, seems they specifically underwrite for these problem companies” the above hedge fund rep said.
Xu and his group only need to search for more Chinese companies.
But the core people in Xu’s group must keep a low-profile.
At a most recent public event, Xu’s brother-in-law Yu Weijiang, thru his company’s name, appeared in a “Upgrade from the Copycat Industries”forum
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