Corporate Dispute Linked to Corruption Probes

A corporate dispute between state-owned and its largest shareholder, real estate company Beijing Zenith Holdings Co., has been linked to ongoing corruption investigations and the political power struggles that may be fueling them. Shai Oster and Keith Zhai report for Bloomberg:

The mutual recriminations involve allegations of corruption, denied on both sides, and reported links to powerful political backers under investigation for wrongdoing. The case illustrates how President Xi Jinping’s anti-corruption crusade is spilling over into business disputes. The Communist Party warned last month that political cliques and their corrupt business ties wouldn’t be tolerated.

“The anti-corruption campaign is the golden opportunity for companies, especially the state-run firms, to tarnish their business opponents or even political rivals,” said Zhang Ming, political science professor at Renmin University in Beijing. “The anti-graft fight in China is not yet institutionalized, but is a system based on public reporting. So it’s really easy to be used by the public as a weapon to target anyone they want.” [Source]

The “powerful political backers” that have been publicly linked to Founder include former deputy minister of state security Ma Jian and Ling Jihua, former aide to Hu Jintao, both of whom are under investigation. Cary Huang reports for the South China Morning Post on Ma’s case:

Some overseas media reports said the Ma probe was connected to Zhou [Yongkang]’s case, but sources told the Post the investigation was tied to an inquiry into the top management of the Founder Group, a Peking University-owned technology conglomerate. Ma is believed to be close to the company’s chief executive, Li You, who allegedly financed hugely profitable securities trades carried out by one of Ma’s relatives.

Ma made his last public appearance on December 7 in a visit to Pakistan.

Meanwhile, the Politburo Standing Committee said following a meeting it would strengthen the party’s centralised and unified leadership, which it called a fundamental political rule. The meeting was chaired by President Xi Jinping. [Source]

Various media reports have also alleged ties between Founder CEO Li You and .

The dispute started when Zenith accused Founder of embezzlement and of failing to honor its contract, and has since involved accusations of wrongdoing on both sides, many of which have been levied via the companies’ social media accounts. For the South China Morning Post, Toh Han Shih provides background on the relationship between the two companies:

Beijing Zenith Holdings’ inability to obtain 3 billion yuan (HK$3.74 billion) from Founder Securities, a unit of Peking University-backed Founder Group, prompted the property developer to start an online war between the business partners over recent months. Zenith claims the brokerage is stalling on its demands.

Issues at the heart of their dispute were revealed in greater detail in documents released by Founder Securities on the Shanghai Stock Exchange yesterday. The papers were used to support Zenith’s case against the broker during arbitration.

Although Founder Securities and Founder Group strongly denied corruption allegations levelled by Zenith, top executives of the firms were questioned by investigators on Sunday.

Zenith became Founder Securities’ No2 shareholder with a 21.86 per cent stake on August 11 last year. Founder Securities has since failed to honour its contract with Zenith to hold a general meeting to change its board of directors and board of supervisors, Zenith alleged in the arbitration documents. [Source]

Zenith has accused Founder Finance, part of the Founder Group, of embezzling funds from its sister company Founder Securities, which company representatives have denied. From another report by Toh Han Shih at SCMP published January 14:

Both companies share the same parent, Founder Group. On January 5, Founder Group chairman Wei Xin, chief executive Li You and president Yu Li were asked to assist in investigations by mainland authorities, Founder Group’s website said. Since then, Founder Group had replaced the three executives. Yu is also a director of Founder Securities, a Shanghai-listed financial firm, and chairwoman of Founder Finance, a financial institution. It is not clear whether she has relinquished those roles.

[…] In another Shanghai Stock Exchange announcement yesterday, Founder Securities admitted that “flaws in the disclosure of its finances, its acquisition of Minzu Securities from Zenith and the actual controlling shareholder of Zenith, were still not resolved”.

In an announcement on Zenith’s website published on January 9, Zenith said its controlling shareholder, Guo Wengui, “hopes to meet Founder Group’s new management to resume normal relations as soon as possible, to uphold the legal rights of Founder Securities and shareholders”.

But in that same announcement, Zenith alleged “a criminal gang” including Wei, Li and Yu illegally gained control of more than 65 per cent of Founder Group and fraudulently obtained more than 60 billion yuan in loans. [Source]

As investigators began questioning Founder staff, Lei Jie, the chairman of Founder Securities and its joint venture with Credit Suisse Group, Credit Suisse Founder Securities, went missing. Cathy Chan and Alfred Liu of Bloomberg report:

Lei asked for a week’s sick leave Jan. 12 and the firm hasn’t been able to reach him since Jan. 19, Founder Securities told Shanghai’s stock exchange Thursday night. Lei couldn’t be reached on his mobile yesterday. Hui Yuk-min, a spokeswoman for Credit Suisse in Hong Kong, declined to comment.

[…] “This is a headache for Credit Suisse — it’s a problem that nobody could have expected,” Linus Yip, a strategist at First Shanghai Securities Ltd., said in Hong Kong by phone. “One of the major risks for foreign firms in joint ventures in China is suddenly discovering some problem with the partner that is beyond their imagination.”

[…] The Swiss lender owns a third of Credit Suisse Founder Securities Ltd., which was set up in 2008 and competes with similar partnerships between Chinese firms and global banks including UBS Group AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. Foreign banks are allowed to underwrite stocks and bonds in China only through joint ventures with local firms. [Source]

According to the Bloomberg report quoted above, Zenith founder, billionaire Guo Wengui (Miles Kwok), has been touted in the official media as “the person behind the downfall of many senior officials.” Founder posted messages it says the company received from Zenith. From Bloomberg:

“I have already sent people to monitor your WeChat, text messages and e-mail, so I know everything about you,” said the message Founder posted on its Weibo account, without identifying who sent it but indicating it came from Zenith.

The text boasted that the Communist Party “listens to my commands” and would soon have ministerial-level officials help destroy Founder. [Source]

The Bloomberg report includes many more details about the allegations and recriminations, including a report that armed police raided a hotel room where Founder executives were “holed up” in December.