At the end of 2015 we wrote about what may have been the most amusing incident of Chinese corporate fraud in recent years, one in which China Animal Healthcare, whose stock was suspended nearly a year prior and which, was just waiting for its delayed audited financials to be released so its stock can resume trading. The problem, as a subsequent public filing revealed, is 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.
As a result, the company will never file its audited financials, the stock will never resume trading, the management team will never go to prison for what was clearly massive corporate fraud, and the story will quietly be buried under the rug with management quietly getting a get out of jail card after the government likely provides a partial or full bailout to all investors, whether bond or stock.
And so on, until the next major fraud.
Presenting Dongyue Group Limited, a Chinese company specialized in chemical production and engaged in the "manufacture, distribution and sale of refrigerants, polymers, organic silicone and dichloromethane, polyvinyl chloride and liquid alkali and others." What the company does is not important.
What is important is that just like China Animal Healthcare, Donguye has been halted for trading as of February 1, and also like the prior fraud, it has announced that it too will be unable to file its 2005 annual results on time.
However, there we no public documents stolen from random trucks in this case. Donyue's "explanation" is most entertaining.
Here is what the company said in its filing:
The Company conducted an internal audit in mid-September 2015, through which it found approximately RMB978.2 million which was booked under the line item “other receivables” (the “Receivables”) and which belongs to the wealth management business of the Group. During the course of the internal audit, it was found that certain interest accrued on such funds had not been received.
The plot thickens:
In addition, the Company found that the balance of two deposits with an amount of RMB200 million and RMB300 million respectively which were both deposited into a bank in the PRC (the “Long-term Deposit”) remained unchanged over a long period of time. The Company therefore inquired a former employee of the Company (who was then the PRC financial controller of the Company) about such situations. Such former employee explained that the Receivables and the two Long-term Deposits were bank wealth management.
Financial controller is another word for CFO while "wealth management" is the catchphrase for "we put the money in a black hole with hopes of generating double digit returns." At which point the company got nervous:
On 2 November 2015 (an account closing day of the Group), upon enquiries with the bank, the Company was informed that the balance of the two Long-term Deposits was zero.
Oops: the money was gone, all gone. So what did the company do knowing that the money its CFO had put in some local bank was never actually there?
The Company immediately reported the suspected incident to the local public security authority in the PRC (the “Public Security Authority”) on the same date. The Public Security Authority has launched an investigation of the reported incident accordingly. On 29 January 2016 (after trading hours), the Company was informed by the Public Security Authority that it had made an application for arresting a former employee of the Company (the “Suspect”) for suspected misappropriation of funds of approximately RMB500 million belonging to the Group (the “Suspected Misappropriation”).
In other words, it took the company and local authorities to realize what was obvious from day one: the CFO had corzined the money.
As it turns out the CFO was corzined the entire "other receivable" amount:
The Public Security Authority has also been investigating the Suspect for suspected unauthorised use or potential misappropriation of funds of approximately RMB978.2 million under the Receivables (the “Suspected Potential Misappropriation”). As at the date of this announcement, such funds and the relevant interest have not been repaid. The facts and evidence are being investigated and verified by the Public Security Authority. The Company was further informed by the Public Security Authority on 2 February 2016 that the approval for arresting the Suspect had been granted by the prosecutorial authority on the same date.
Where the plot really thickens is that while the controller was no longer in his position as of November 3...
The Suspect had been the PRC financial controller of the Company before all his powers and functions of office were dismissed on 3 November 2015 by the Company.
... it took until January 29 to terminate him:
The Suspect had ceased to be employed by the Company since 29 January 2016 due to his suspected criminal charge.
Did he work alone? Of course not:
The investigation is currently underway and the Company is proactively cooperating with the Public Security Authority. There are another two employees of the Group who are being investigated by the Public Security Authority. They are staff of the finance department of the Group and have ceased their duties in the financial department, pending investigations by the Public Security Authority. As at the date of this announcement, to the best knowledge of the Company, no other person other than the Suspect have been detained or arrested for the Suspected Misappropriation and the Suspected Potential Misappropriation.
Of course not, because the most likely explanation is that the controller, the "two employees" and everyone else in the company had been in on the scheme from day one. However, since a scapegoat was required, the CFO drew the short stick.
And now its time to cover asses:
The Company has set up an independent committee and such committee will appoint an independent forensic expert to perform an independent review and/or investigation to circumstances of the Suspected Misappropriation and Suspected Potential Misappropriation and other related matters.
The directors of the Company (the “Board”) confirms that, as at the date of this announcement, the production, supply and sale activities of the Group remain normal and are not affected by this incident. On a preliminary review based on information currently available, the Board considers that the Suspected Misappropriation and the Suspected Potential Misappropriation do not have an immediate material impact on the production, supply and sale activities of the Group but will be assessing the situation on an on-going basis. The Board is currently assessing the impact of the Suspected Misappropriation and the Suspected Potential Misappropriation on the financial position of the Group. This announcement is prepared based on information currently known to the Company only and the Board will continue to inquire the development of the investigation on the Suspected Misappropriation and the Suspected Potential Misappropriation. The Board will update the shareholders and potential investors with respect to any further material developments concerning the investigation as and when appropriate.
Something tells us that the definition of an "independent committee" and "expert" will be vastly different from the generally accepted one. But most importantly, as of this moment, the company is in a state of suspended animation:
In light of the Suspected Misappropriation and the Suspected Potential Misappropriation and the fact that the related investigation is under process, the Board expects that there may be delay in the publication of the 2015 Annual Results.
At the request of the Company, trading in the shares of the Company on the Stock Exchange was halted with effect from 9:00am on 1 February 2016 pending the release of this announcement. Application has been made to the Stock Exchange for the resumption of trading in the shares of the Company with effect from 9:00 a.m. on 25 February 2016.
To summarize: no annual report, most likely ever again, no more stock trading, the senior management hiding behind an independent committee, meanwhile the CFO is long gone, lying on a beach with 1 billion yuan collecting 0.20% percent. And that is how you do fraud.
As for shareholders? The company added one final insult to monetary injury with the following bolded, all caps disclaimer in the press release:
SHAREHOLDERS OF THE COMPANY AND POTENTIAL INVESTORS ARE ADVISED TO EXERCISE CAUTION WHEN DEALING IN THE SHARES OF THE COMPANY