Online lender orchestrated $10.8b Ponzi scheme

Investors wearing T-shirts that read "Ezubao: Raise hands, lose a family fortune" - a play on the company's slogan - protesting in Beijing yesterday against the P2P lender exposed as operators of a Ponzi scheme.
Investors wearing T-shirts that read "Ezubao: Raise hands, lose a family fortune" - a play on the company's slogan - protesting in Beijing yesterday against the P2P lender exposed as operators of a Ponzi scheme.PHOTO: AGENCE FRANCE- PRESSE

BEIJING • Almost overnight, Ding Ning and Zhang Min struck it rich with the hot new thing in Chinese finance: peer-to-peer lending.

But what seemed to be an Internet phenomenon turned out to be nothing but a lie - a vast Ponzi scheme that appears to have been orchestrated by these Bernie Madoffs of China.

Celebrated as a new model of financial services in the country, Ezubao collected 50 billion yuan (S$10.8 billion) in less than two years from more than 900,000 investors through savvy marketing and the promise of big returns.

But executives at Ezubao's parent company, Yucheng Group, now say it was a Ponzi scheme which used investor funds to support a lavish lifestyle, the official Xinhua news agency said.

Among gifts that Yucheng chairman Ding Ning, 34, gave his president and girlfriend, Zhang Min, were a US$20 million (S$28 million) villa in Singapore, a US$1.8 million pink diamond ring, luxury limousines and watches and more than US$83 million in cash.

  • LAVISH GIFTS

  • Yucheng chairman Ding Ning used the money from the Ponzi scheme to buy these presents for his girlfriend Zhang Min, president of the company:

    • A US20 million (S$28 million) villa in Singapore;

    • A US$1.8 million pink diamond ring;

    • Luxury limousines and watches; and

    • Over US$83 million in cash.

And when it was no longer feasible to manage the scam, the perpetrators literally buried evidence of their wrongdoing, the South China Morning Post in Hong Kong reported.

"It was just a matter of time before we saw something this big keel over," Mr Zennon Kapron, managing director of consulting firm Kapronasia, told Bloomberg.

According to the China Banking Regulatory Commission, there were more than 3,600 peer-to- peer (P2P) platforms as of last November, which raised more than 400 billion yuan.

More than 1,000 of those were problematic, it said while warning that the explosive growth of the lending - not only in China, but around the world - means other problems could be lurking.

The authorities said Ezubao, which translates into "easy-to- lease", had promised returns of up to 10 times the official deposit rate, allowing the online public to invest in underlying assets in leasing contracts and get returns from the cash flow paid by lessors.

Almost 95 per cent of investment projects listed on its website touting annual returns from 8 per cent to 14.6 per cent did not exist, and among the 207 lessors it claimed to work with, only one had done business with it, Xinhua said.

Ding said in a confession broadcast on Monday on state-run China Central Television that he had embezzled about 1.5 billion yuan from company accounts, and most of the money was from Ezubao.

Just a few months before the blow-up of Ezubao, state media was still giving the lender glossy coverage. At an industry conference hosted by Ezubao in June, government officials, corporate leaders, and legal experts discussed the development of Internet finance and risk prevention, and lauded Ezubao's business model.

By last December, when Ding and Zhang realised that new investment inflow could no longer meet interest payments for the old investors, they started to move assets, destroy evidence and prepare to run away, according to their confessions. On Dec 8, local police from various areas coordinated an operation to arrest 21 employees of Yucheng Group.

Police also used excavators and dug for 20 hours to unearth 80 bags of documents that Ezubao executives had buried 6m deep on the outskirts of Hefei, a city in eastern Anhui province.

President Xi Jinping and Premier Li Keqiang have been seeking to remodel China's economy, urging development of new industries such as Internet finance to ensure easy flow of credit without inflating financial system risks. They can ill afford more high-profile blow-ups in the P2P industry.

The consequences when these schemes fail can be devastating, Mr Yang Dong, vice-dean at Renmin Law School and an expert on finance and securities law, told Reuters. "The harm is obvious. It's going to damage financial reforms, cause social unrest and destabilise the regime to some extent."

A version of this article appeared in the print edition of The Straits Times on February 05, 2016, with the headline 'Online lender orchestrated $10.8b Ponzi scheme'. Print Edition | Subscribe