(Yicai) Nov. 16 -- Trust companies in China are reassessing risks after China Soft New Momentum, one of the country's largest managers of fund of funds, accused Huisheng Private Equity Securities Fund Management of fraud.

Yunnan International Trust conducted risk checks in response to the PE fraud incident, the southwestern trust firm told Yicai. People familiar with the matter said to Yicai that Yunnan International Trust had around CNY1 billion (USD138 million) tied to Huisheng.

One of the involved companies had allocated up to CNY3 billion to the Shenzhen-registered PE fund manager that is suspected of fabricating its business performance.

The wave of doubt began when China Soft announced on Nov. 14 that it had difficulties in redeeming assets that were allocated to Huisheng's PE products due to the latter's defaults. Funds may have been transferred through Huisheng's affiliates of Hangzhou Huisheng, Hangzhou Yuyao, and Panjing Equity Investment Fund Management Shanghai.

Yicai learned exclusively from sources that Mao Wai, actual controller of Panjing and the behind-the-scenes ringleader of Huisheng and Yuyao, was taken away by police this month. Yang Zebin, fund manager at Yuyao, was also detained a week ago and the firm's Hangzhou office is already empty.

Several companies have stepped up to maintain their reputation and assets. Bridge Trust announced yesterday that it has never conducted any form of business cooperation with the above-mentioned firms directly involved in the incident and never invested in their products.

An institutional investment insider with no part in the case said that the firm is checking risks and requiring custodians to verify the net value of PE funds.

The way that Huisheng managed to form a complicated structure to embezzle the funds could be illegal as the Asset Management Association of China has explicitly banned multi-layer nesting, industry professionals said.

Chinese PE institutions will be placed under the spotlight, insiders said, adding that regulators are expected to draw a line to ensure market entities will be responsible for their own and investors' interests.

The valuation sheet that China Soft received is faked and funds that were nested under custodians were eventually moved away, sources told Yicai. Later, China Soft is likely to use legal means to require the custodians to repair the situation, they added.

Companies involved risk facing administrative penalties from relevant government agencies and civil compensation claims, said Chen Wei, partner at law firm Hande in Guangdong province.

Editors: Zhang Yushuo, Emmi Laine