Monday, February 1, 2016

Chinese company accused of defrauding investors of $7.6B

Ding Ning, owner of Ezubao
BEIJING - Chinese police arrested 21 employees at China's largest online finance business on suspicion of fleecing 900,000 investors of $7.6 billion, in what could be the biggest financial fraud in Chinese history.

State broadcaster CCTV aired confessions from two former employees at Ezubao, an Anhui Province outfit that rose from obscurity to become China's largest online financing platform in the span of about 18 months.
Ezubao was the most spectacular player in a booming online investment industry that Chinese authorities have been struggling to regulate.

Firms ranging from established Internet companies such as Alibaba to virtually unknown upstarts have flooded into the business, promising higher returns than those at state-run banks, which often offer interest rates below inflation.
Ezubao promised investors that borrowers would pay back loans at interest rates between 9 per cent and 14.6 per cent, but 95 per cent of those borrowers were fictional entities created by Ezubao, a former company executive told investigators.

Ezubao’s website has been shut down and it appeared Yucheng Group’s Beijing office had been closed when Reuters reporters visited before Monday’s Xinhua report. Chinese police said they had sealed, frozen and seized the assets of Ezubao and its linked companies as part of investigations. "The truth is that it's a fraud ... it's a typical Ponzi scheme," Zhang, the associate, said in her aired confession.
A Ponzi scheme is a fraud that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit.

It is named after Charles Ponzi, who simply applied the concept to the arbitrage of International Reply Coupons.
Ponzi's scheme eventually brought down six banks. His investors were practically wiped out, receiving less than 30 cents on the dollar. Investors lost about 20 million in 1920 dollars (245 million in 2015 dollars).

Bernie Madoff's similar scheme that collapsed in 2008 cost his investors about 10 billion, many times the losses of Charles Ponzi's scheme.
Investigators tried to trace Ponzi's convoluted accounts to figure out how much money he had taken and where it had gone. They never managed to untangle it and could conclude only that millions had gone through his hands. Ponzi spent the last years of his life in poverty, working occasionally as a translator.

He died in a charity hospital in Rio de Janeiro, on January 18, 1949.