Lin Min

linmin67@hotmail.com

ABOUT a century ago, “legendary” con man Victor Lustig sold the Eiffel Tower to an unsuspecting scrap dealer. In today’s world, with the latest information at our fingertips, we tend to think grand and outlandish con games like that will never fool a person even with the most innocent mind.

We are wrong.

China’s securities regulator last week fined Shenzhen-listed Zoneco Group Co., once Chinese investors’ darling, 600,000 yuan (US$87,378) for manipulating its profits over the past few years.

The firm has been a subject of ridicule for claiming huge numbers of scallops had mysteriously disappeared from its aquatic farms three times in the past several years.

Although believing Zoneco, better known as Zhangzidao, was not telling the truth, investors had no way to determine the company had committed accounting fraud as it was almost impossible to verify the company’s inventory on the seabed.

Although the China Securities Regulatory Commission (CSRC) did not say whether the scallops “ran away” from the aquatic farms, it did determine following a 16-month investigation that the firm has presented “gravely” untrue financial statements for its 2016 and 2017 operations.

Should the CSRC have not resorted to the latest technology — satellite monitoring records and tracking data of boat activities — it would be nearly impossible for the regulator to pin down Zoneco’s false statements.

In another scandalous event that shocked the stock market, more than 155,000 individual and institutional investors Friday woke up to see Beijing Xinwei Technology Group Co. begin a free fall of its stock as it resumed trading after nearly three years of suspension. Trading in the shares of Beijing Xinwei was suspended at the end of 2016 after a Netease report alleged that Beijing Xinwei overstated its overseas revenue from telecom operations.

A whopping US$50 billion deal, now seemingly defunct, between a Hong Kong-based company controlled by Beijing Xinwei chairman Wang Jing and the Nicaraguan Government in 2013 for building an inter-oceanic canal has also kept people guessing whether it is a historic con game.

Beijing Xinwei had other grandiose ambitions. Before its spectacular downfall, the Beijing-headquartered firm announced in 2016 that it planned to acquire Israeli satellite company Space Communication Ltd. that would facilitate the construction of a sky-earth telecom network, dubbed by some as installing an “ear” for the earth. But the acquisition plan has apparently failed: there was no mention of Space Communication in Beijing Xinwei’s annual reports in 2017 and 2018.

In between the announcements of these awe-inspiring deals, Beijing Xinwei reportedly raised nearly 10 billion yuan after the firm made its trading debut on the Shanghai Stock Exchange through a backdoor listing. Given its grandiose plans, Beijing Xinwei was even once linked to the country’s strategy. At the height of its market performance around 2015, some analysts even urged investors to buy shares of the firm if they wanted to cash in on the rise of China.

Beijing Xinwei reported 1.9 billion yuan and 1.53 billion yuan in net profits for 2015 and 2016 respectively. However, in a drastic turn, the company said it suffered losses of 1.75 billion yuan and 2.9 billion yuan in 2017 and 2018, respectively. While the company’s financial statements show it had 11.1 billion yuan in cash at the end of 2018, it defaulted on 2 billion yuan in bonds in January 2019.

Beijing Xinwei’s auditing firm issued a qualified opinion on the firm’s 2017 financial report and a disclaimer opinion on its 2018 report. As a result of the losses in 2017 and 2018 and the failure to secure auditors’ endorsement, the firm is now facing the risk of being delisted and analysts and mutual funds have expected its share price to dive below 5 yuan from 14.60 yuan just before the trading suspension.

Besides these theatrical stunts, several other cases involving ballooned revenues unraveled this year have stunned investors and shaken their confidence in the country’s stock markets.

Kangde Xin Composite Material Group Co. was found to have overstated profits to the tune of 11.9 billion yuan from 2015 to 2018, when the company actually had suffered huge losses.

Chengdu Huaze Cobalt And Nickel Material Co., which was delisted early this month, suffered huge losses from 2015-17 and the controlling shareholders were found to have embezzled the firm’s funds amounting to more than 1 billion yuan between 2013 and 2015. The controlling shareholders, Wang Tao and Wang Yinghu, were each given a fine of 300,000 yuan and Wang Tao was banned from the stock market for life.

Zoneco was fined 600,000 yuan while its chairman Wu Hougang was given a lifelong market entry ban, which means he will be barred from acting as a director or executive of a listed company and engaging in securities business for life.

These are the highest possible punishments given under China’s current Securities Law, but are disproportionate to their wrongdoings and the losses caused to investors, as well as the damages to investors’ confidence in the market.

While investors have the legal venue to seek compensation from listed companies, it may not help because these companies usually have nothing left to effectuate a payout.

The lenient punishments spelled out under the Securities Law explain why so many con games have flourished in the stock markets. If lawmakers do not take swift and decisive actions, the robust initial public offering markets will definitely entice more con men to make big money, with very few or no serious consequences awaiting them.