Bond Scam Uncovered in 2010 Apparently Resurfaces

04.22.2013 15:28

Bond Scam Uncovered in 2010 Apparently Resurfaces

Police arrest prominent financial executives for allegedly trading in inter-bank market through a type of account abused three years ago

By staff reporter Zhang Yuzhe

(Beijing) – Financial regulators have closed in on a number of suspects who apparently cheated in the bond market using a method that came to light in late 2010.

Police have arrested a number of prominent financial executives, including Yang Hui, managing director of the fixed-income department at CITIC Securities, China’s largest securities firm.

The scandal has attracted the attention of the highest levels of government. Vice Premier Wang Qishan, head of the Communist Party’s Central Discipline Inspection Commission, has told regulators to investigate all cases and punish the perpetrators.

The rule breakers were apparently using a tactic that involved a regulatory loophole in the bond market. The loophole was exposed by a 2010 investigation into Zhang Rui, then an official in the Ministry of Finance’s Department of Exchequer.Zhang was found guilty of illegally trading bonds through Class C accounts, which are registered with the China Government Securities Depository Trust & Clearing Co. Ltd. and used by non-financial institutions and legal persons to trade bonds in the inter-bank market.

He was initially caught sending text message to traders, tipping them off about the price of government bonds before auctions started. Zhang was taken in for questioning by the party’s discipline watchdog in December 2010 and later handed to the courts. Investigators found that he made more than 40 million yuan in illegal gains, including 6 million yuan in bribes from the company that printed the government bonds.

Zhang was convicted of those crimes in a closed-door trial last year and sentenced to life in prison, sources close to the ministry said.

His case brought the central government’s attention to Class C accounts, which were loosely monitored and regulated. A series of measures have been taken since then to attempt to control retail investors’ access to the accounts and make it harder for the account holders to take advantage of bank resources for personal gain.

Zhang and his wife set up an investment company to trade bonds, including short-term bonds and medium-term notes through Class C accounts, a source with knowledge of the matter said.

The couple “secretly divorced a long time before but no one in the Ministry of Finance knew because they continued appearing at various occasions as a couple,” a source close to the ministry said. He added that they divorced probably because it was easier to hide assets.

Zhang started at the Department of Exchequer in 1997. Starting the next year, he was in charge of the issuance and redemption of government bonds.
The full story of the crackdown on illegal bond trading through Class C accounts will be published soon.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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