(Yicai Global) Aug. 23 -- Swindlers always try to manipulate share prices, but like the dog with the bone in Aesop's fable, they do not always make off with the swag they seek. 

A penalty ruling released by China's securities regulator relates the heart-warming story of how two such flimflam operators fiddled a listed company's shares, anteing up nearly CNY1.7 billion (USD250 million), but wound up losing CNY550 million (USD80 million), and trading a life of privilege for life as a fugitive.

Farcically, Zhu Yidong, the actual controller of Shanghai Fuxing Financial Holding Group, rented a presidential suite and hired attendants and bodyguards for one Li Weiwei, who betrayed Zhu and caused him to lose a huge sum by appropriating the funds Zhu gave him. The regulator levied penalties against both after their illegal practices transpired.

Fuxing and Li used 25 institutional accounts and 436 individual ones to manipulate the stock price of Northeast China-based Dalian Insulator Group [SHE:002606], pushing it up by 114.32 percent from June 28, 2016 to March 1 last year, investigation results released by the China Securities Regulatory Commission on Aug. 14 show. 

The commission has barred Li for life from the securities sector, issued a CNY2 million fine and banned Zhu for three years with a CNY600,000 (USD87,500) fine -- in absentia, for reasons that will plain became anon. Others also implicated have also suffered sanctions, but these are mere bit players and extras, and so need not detain us here.

Our cautionary tale begins in 2016. At that time, Zhu Yidong was a second-generation rich kid in Shanghai, a so-called 'fu er dai.' Relying on his father's wealth gained from mining rare earth, Zhu plied the real estate, finance and other businesses before turning his hand to A-shares. The Fuxing Group he owned used accounts it controlled to buy shares in several listed companies, among them electrical product maker Shenzhen-listed Dalian Insulator Group.

Zhu, then chairman of Fuxing Group, and Liu Guixue, former actual controller of Dalian Insulator, reached a preliminary letter of intent to acquire a controlling stake in the firm in March 2016. The former paid the latter a security deposit. However, at the start of the acquisition, Zhu apparently mistrusted Liu, worried he would find another buyer and scrap the deal.

Zhu related this concern to an underling, Zheng Weixing, Fuxing Group's general manager of mergers and acquisitions and restructuring division. Zheng therefore suggested Zhu first buy the stock on the secondary market and introduced Li to a "top stock trader" he knew.

Zhu's purpose was very clear: he hoped Li might buy more shares in the secondary market to lift his firm's market value. Fuxing and Li started manipulating the stock price in cahoots starting June 28, 2016. Fuxing gave Li the funds he used to rig share prices.

Enter the China Securities Regulatory Commission, the country's top securities sentinel. The CSRC probe found that Fuxing and Li used their capital advantage multiple times in the course of trading Dalian Insulator to inflate its stock price, traded between accounts controlled by Li, and used inside information to swell the share price. From June 28, 2016 to March 1 last year, the company's stock rose over one-fold.

The reason this scheme came a cropper in the end and resulted in a huge loss is because Li privately increased the leverage on the funds to speculate on other stocks. 

During these manipulations, Li used Fuxing's funds multiple times to trade in other stocks, which caused Dalian Insulator's shares to plummet from the end of October to early November 2016, the CSRC investigation results showed.

The stocks Li invested in continued to fall to the daily limit at the end of February last year, resulting in forced liquidation of the accounts he controlled. The stock price of Dalian Insulator continued to slump to the daily 10 percent limit down on both Feb. 28 and March 1. Dalian Insulator then suspended trading on March 2 when it announced a major asset restructuring.

Fuxing transferred a total of about CNY1.7 billion via the bank account it controlled to accounts Li controlled from July 2016 to March last year. After Dalian Insulator resumed trading Dec. 6 last year, Li sold the stock in his accounts. Li had realized a total loss of CNY551 million as of March 28.

Zhu discovered that Li had arranged personnel to ply unplanned transactions on or around October 2016. In order to enhance management and surveillance of Li, he successively arranged rooms at five-star hotels for Li. Li, flanked by attendants and bodyguards, received the royal treatment. Fuxing Group splashed for the food and accommodation expenses for Li, his retainers, bodyguards and traders.

Fuxing Group purchased 40 laptops, 120 wireless network adapters and 40 wireless routers for Li and other personnel to use in November 2016. Interestingly, the room chosen for the transactions was the No. 8888 Presidential Suite, which is a homophone for 'making a big fortune' in Chinese.

For the purpose of manipulating the stock price, after it finally succeeded in acquiring Dalian Insulator Group September 2016, Fuxing Group took over the latter's information disclosure and capital operations, and Zhu initiated and decided all information disclosures of major events. 

To cooperate with Li in stock trading, Zhu Yidong successively resolved on and issued announcements on large share transfers, announced increases in shareholding and overseas investments. The account team Li controlled started mass selling after the release of these favorable statements.

The CSRC determined in its penalty notice that Fuxing Group and Li repeatedly used their capital advantage to pump up the prices in their transactions in Dalian Insulator shares and traded between accounts they controlled, made false declarations, and exploited inside information to manipulate share prices. 

The regulator believed that Fuxing Group and Li cooked up the prices through a variety of illegal means. The substantial sums involved in the case seriously disrupted the order of the securities market and exerted a grievous social impact, CSRC found.

Falling Silent

Zhu disappeared without trace on June 16. "We talked on the phone that afternoon, but suddenly I couldn't get through to him in the evening. Then I contacted him via WeChat [popular messaging app], and at last, it turned out that he didn't even reply to my WeChat message," one staffer with a creditor firm of Fuxing Group told Yicai Global, adding that this disappearance from the radar screen surprised everyone, including Zhu's wife and father.

A senior executive of a Shanghai-based enterprise who is close to Zhu slammed him as a liar, saying his capricious actions at Fuxing Group drove its former shareholders, his initial partners, to quit.

Zhu and his father did earn a lot of money in early years when times were good, but the company's development was too breakneck. Zhu frittered the firm's funds away on luxury homes, and he had the sole and final say on all matters within the company. 

He even let outsiders like his driver and warehouseman act as company legal representatives. Finally, a former shareholder of Fuxing Group was strong-armed into transferring his shares to Zhu. 

Zhu had also delayed registering changes in the company's business with the authorities since he thought this would destabilize it, and delayed payment of  CNY200 million already overdue for a share transfer, per the senior executive, who added that Zhu asked one of his friends to stand guarantor for loans just before he faded from contact, whereupon Zhu absconded with the cash.

Li Weiwei, styled 'North China's top trader,' is even more enigmatic than Zhu. The first time he came into the public eye was also in January, when the media exposed the Dalian Insulator share price dodge.

Only one wealth management company was under Li's name. It formed April 15, 2016 with registered capital of CNY30 million, with Li holding 100 percent of the equity, public information shows. Li also did a moonlit flit, and his present whereabouts are likewise unknown.

Editor: Ben Armour