China's Madoff Moment: The Latest About The Alleged $7.6 Billion Ponzi Scheme

Last week authorities arrested nearly two dozen employees of a shuttered Chinese peer-to-peer lender on accusations that the company was a massive Ponzi scheme that had taken in billions from countless investors.  These mind-blowing figures were soon followed by revelations of lavish purchases by key insiders - including a $12 million diamond ring - as well as some slick policing that uncovered (literally) nearly 100 bags of evidence buried 20 feet underground.  As the rest of the world struggles to get their head around the sheer size of this scheme, which would be the second largest Ponzi scheme in history, more details have started to trickle out which shed further light on the allegations. 

Ezubao (also referred to as Ezubo by several publications) shot to prominence in the past two years as one of many Chinese peer-to-peer lenders operating in China’s “shadow banking” industry.  Ezubao and others catered to smaller or underserved business segments which might not qualify or meet the standards for the extension of credit from established financial institutions.  As a subsidiary of Yucheng International Holdings Group, Ezubao purported to finance equipment purchases for small to medium-sized businesses, who in turn paid rental payments to Ezubao for the use of that equipment.  Ezubao pointed to these profitable lending relationships in soliciting investors with promises of annual returns ranging from 9% to 14%.  These above-average returns, which were up to ten times higher than the official rate offered by Chinese banks on deposits, caused investors to flock to Ezubao.  In total, at least 900,000 investors handed over at least $7.6 billion. 

One of the reasons for Ezubao’s explosive growth may lie in its extensive use of marketing to cultivate a favorable reputation and public image.  Last year, the company reached millions by sponsoring online broadcasts of the National People’s Congress and even having its logo hung in the Great Hall of the People in Beijing.  The broadcasts were carried by a subsidiary of Xinhua, which is a Chinese state-owned news agency.  The company also ran prime-time television advertisements on state-owned television channels and had its logos covering seats on the Shanghai-Beijing high-speed train. In a particular stroke of irony, the company was even the recipient of an award given to the most responsible internet finance companies from state-run news company China Newsweek.  In addition to creating the impression that it was blessed by the Chinese government, Ezubao also used its own employees to project an appearance of success by implementing a formal dress code.  Indeed, more than $100 million was distributed to employees this past November, with a portion of the funds earmarked for the purchase of luxurious clothing and jewelry.  The company also sponsored industry conferences, including one just months ago that featured government officials and other industry leaders extolling Ezubao’s business plan and prospects.  

But authorities now allege that Ezubao’s business was a massive fraud built on lies.  China’s news agency is now reporting that approximately 95% of the investment projects listed on Ezubao’s website were simply made up.  Similarly, of the 207 companies Ezubao claimed to call business partners, only one of those partners had apparently ever done business with Ezubao.  Authorities discovered that the company had shelled out as much as 800 million yuan to buy business plans from corporate brokers and use those details to fabricate investment projects used to solicit potential investors.  In a confession being broadcast by Chinese state-run media, Ezubao founder Ding Ning admits that he embezzled close to 1.5 billion yuan from the company and lavished Yucheng president (and girlfriend) Zhang Min with hundreds of millions of yuan in cash payments and the purchase of luxury items such as a 12-million yuan diamond ring.  

As the scheme began to collapse in December 2015, Ning and Min claimed in their confessions that they began making plans to run away and hide evidence.  Authorities somehow caught wind of the scheme and were able to learn that employees had hidden dozens of bags of documents underground in the outskirts of a Chinese province.  Two excavators and twenty hours of digging later, authorities uncovered the hidden documents.  

It remains unknown as to what charges Ning, Min, and the other Ezubao employees will face, but China differs from the United States in that it allows the imposition of the death penalty for nearly sixty offenses, including fraud and economic crimes.  One Chinese businessman labeled as China's "Madoff" was secretly executed back in 2013 after being convicted of running a $460 million Ponzi scheme.