Ye Fei stocks scandal shows why China must encourage whistle-blowers

Admin
June 1, 2021
  • The private equity manager sparked a national storm after claiming at least 18 stocks were being manipulated by listed companies, private equity funds, publicly offered funds, brokers and proxy holders
  • Chinese regulators should learn from their US counterparts and offer greater financial rewards to those who, in exposing corruption, risk their jobs – and in some cases much more

For an outsider to understand China’s  stock markets, which are dominated by retail investors and thus known for high levels of market turnover and volatility, learning about harvesting chives and stir-frying methods in Chinese cookery would help a great deal.

By official counts, there are more than 180 million mostly small investors who, driven by rumours, trade in and out of positions very frequently, contributing to wild fluctuations. The trading pattern is known as chao, the Chinese term for a method of stir-frying meat or vegetables rapidly in a wok at high heat.

This method of trading makes suckers out of many, who are compared to chives. Easy to grow and known as a culinary delicacy across China, chives are a hardy perennial plant which return every year after being harvested. The phrase Ge Jiu Cai or “harvesting chives” is a way of saying that as one group of investors falls prey to rampant securities frauds, another group always steps up.

It is an open secret that retail investors are often harvested like chives by unscrupulous brokers and fund managers but securities frauds are harder to prove and nail without the help of whistle-blowers.

 

 involved Ye Fei, a controversial private equity manager and an online influencer, who took to Weibo, the Chinese equivalent of Twitter, to allege that at least 18 stocks were being manipulated by listed companies, private equity funds, publicly offered funds, brokers, and proxy holders.

 

Since May 9 when Ye first made the allegations, a national storm has erupted, sending the related stocks plummeting and confirming the worst fears of small investors who have called for a thorough investigation and stern punishment including long jail sentences and high fines for the offenders.

 

The China Securities Regulatory Commission (CSRC) has since opened an investigation into two companies named by Ye, vowing “zero tolerance” against market manipulation.

 

According to media reports and Ye himself, he decided to spill the beans because he did not get paid after he acted as a middleman in a failed scheme to drive up the share price of the listed ZOY Home Furnishing

He alleged that he was approached by proxies acting for the company to pool funds to drive up its share price by at least 30 per cent. The proxies, claimed Ye, promised him that the majority shareholders would not dump shares during the process and guaranteed him and stock buyers a healthy commission as well as making up for their losses if the scheme went awry.

 

In return, Ye reached out to another intermediary who managed to line up two securities brokers, Tianfeng Securities backed by the provincial government of Hubei, and Minsheng Securities, a leading broker, both of which agreed to put up 15 million yuan (US$2.3 million) each.

 

On the day of the action, the share price of ZOY fell by the 10 per cent daily limit even after Minsheng Securities stepped in to buy more than 15 million yuan worth of shares, prompting Tianfeng Securities to back out of the scheme

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