Two days ago we said that the explanation provided by China's latest corporate fraud, China Animal Healthcare, for "losing" its books, may well be the greatest official reason provided by a management team for cooking the books.
As we summarized [7], "China Animal Healthcare said in a statement to the Hong Kong stock exchange that a truck loaded with four years’ worth of its original financial documents was on its way to Beijing. However, while the truck driver was taking a lunch break, the truck was stolen. One week later the truck was found... but the four years of financial documents were gone."
Today we encounter another insolvent Chinese company (one which soon be revealed as the next in a long series of mainland corporate frauds) Shandong Shanshui Cement Group, which is the domestic subsidiary of Hong Kong-listed China Shanshui Cement Group, and which defaulted on a bond payment in November. It is about to default again after earlier this week the company said "it was at risk" of defaulting on another bond for 1.8 billion yuan, maturing on Jan 21, 2016.
Here, however, an unusual twist emerges: it appears that the latest default notice may have been "unauthorized"... because as usually happens with insolvent frauds caught in a death spiral, there is a suspenseful back story.
As the WSJ writes [8], eight of China Shanshui's directors were removed earlier in December in a power struggle after Tianrui Group gained control of Shanshui’s board.
The removed directors include Zhang Bin, formerly Shanshui’s chairman and general manager and the son of company founder Zhang Caikui.
The struggle started when Tianrui Group—also the largest shareholder of another Hong Kong-listed company, China Tianrui Group Cement Co. Ltd.—gained control of Shanshui by successfully buying a stake even larger than the Zhang family.
Tianrui, with its 28.16% stake, took control of the Shanshui board at an extraordinary general meeting on Dec. 1. It immediately ousted eight directors who were mainly representatives from the second-largest shareholder, the Zhang family.
Two days later, Shanshui said it had given instructions to its legal adviser to start proceedings against Zhang Caikui and Zhang Bin in connection with “alleged unlawful course of conduct and breach of fiduciary duties,” but it didn’t disclose details.
It gets better: "A person speaking for Shanshui said Wednesday that some departments of its major operating unit, Shandong Shanshui Cement Group, were still “illegally occupied” by former management. Moreover, the cement unit has issued what the person speaking for the company described as an “unauthorized” notice of default of certain bonds."
As noted above, Shanshui, which earlier defaulted on a two billion yuan ($308 million) onshore bond on Nov. 12, warned Tuesday night that it may default on the onshore bond due in three weeks as "some of its bank accounts and assets were frozen due to lawsuits against the company" according to a statement posted on Chinabond, one of China’s main bond clearinghouses.
"But the person speaking for Shanshui said that statement wasn’t authorized."
Wait, what?
“We haven’t authorized the issuance of the statement,” the person said, adding that all the company’s formal statements were issued via the Hong Kong stock exchange.
The person speaking for Shanshui said the company has “adequate funding” for interest payments of all its outstanding debts, include both onshore and offshore.
So if has adequate funding, why not just pay the defaulted obligations then? And therein lies the rub.
It turns out that in an almost identical incident to China Animal Healthcare, the company mysteriously "misplaced" its books, only the the reason was far less creative: the company's new board and management said it is unable to repay its outstanding obligations immediately due to "technical reasons" namely that they are unable to locate certain books, records and important documents at this stage—the items Shanshui says may be stolen.
But one can't just "lose" the company's "books, records and important documents" - there has to be a reason. For that we go to the filing posted overnight [9]by the company in which it lays out the "culprit.
In the PDF, we first read the details of the document "loss", namely that:
"the Commercial Crime Bureau of the Hong Kong Police (the “CCB”) has taken up the report of the Company regarding the loss of certain books, records, important documents and electronic data in the Company’s principal place of business (details of the complaint are contained in the Announcement)."
... followed immediately by Shanshui's version of the "dog stole my truck and kept the secret documents" excude:
Despite the cooperation and assistance of the Jinan Municipal People’s Government (the “Jinan Government”), it was reported by Shandong Shanshui that Chen Xueshi, a former director of Shandong Shanshui, together with a group of gangsters, barged into the Headquarters by force on 27 December 2015, destroyed the properties in the offices therein and assaulted the employees of Shandong Shanshui.
The matter was instantly reported to the local police and the Jinan Government. Chen Xueshi and the gangsters were taken by the local police for questioning and investigation.
So it was the gangsters' fault the company's financial records are missing? One can only hope the police questioning will make them reveal just what was in the now surely hopelessly lost key financial records.
[10]
Chinese gangsters, stock photo, mdp.com
To summarize: a perfectly non-fraudulent Chinese company would have easily made its upcoming bond payment (because it clearly has the adequate funding) if only it were able to "locate certain books, records and important documents", records which may have been "destroyed" when a former director together with a group of gangsters barged into the company's office and assaulted employees.
We can't wait when bizarro fraud such as this one finally crosses the Pacific and lands at some junk bond issuer/buyer in the US where the resulting drama will make for weeks of tragicomic realty TV to fill the void left from the accelerated arrest of Martin Shkreli.
