Back in late 2015, when the Chinese stock bubble had violently burst and was suffering daily moves of 10% in either direction as retail traders scrambled to get out of what until recently was a "sure thing", Beijing did what it does best, and found a convenient scapegoat on which to blame the market crash - which was function of the country's relentless debt bubble and lack of trading regulations - in late 2015 it arrested one of the most prominent hedge fund traders, Xu Xiang, also known as “hedge fund brother No. 1” and "China's Carl Icahn" for his phenomenal, and rigged, winning record in the stock market, who ran the Shanghai-based Zexi Investment.
Which is not to say that Xu wasn't engaged in shady activites: while the country’s stock prices plummeted in 2015, Zexi’s investments earned an average 218%, far more than the second-most profitable player, Shen Zhou Mu Fund, which reported a 94% yield, according to market analysis website Licai.com.
Xu was detained by police in November 2015 on the highway between Shanghai and Ningbo, in an arrest that was captured in photographs and widely circulated on social media. Police later froze over $1 billion of shares in listed companies with connections to Xu’s investments, according to exchange filings by those firms. Xu, born in 1976, started investing at high school in the eastern city of Ningbo, according to the official People’s Daily. Skipping university, he instead became a professional investor, accumulating over 4 billion yuan in personal wealth and managing tens of billions of yuan, the People’s Daily reported in 2015.
Fast forward to today, when China sentenced the former billionaire hedge fund manager to five and a half years in prison for stock-price manipulation, in one of the country’s most high-profile cases following the 2015 market rout. Xu Xiang, founder of Shanghai-based asset management firm Zexi Investment, and two associates were convicted of driving up share prices, the Qingdao Intermediate People's Court in Shandong province said on Monday. Xu was also fined 11 billion yuan ($1.6 billion), sources who attended the court hearing said. It is the highest-ever fine for an individual committing a financial crime in China.
Wang Wei, owner of three asset-management companies, received a three-year prison term and was slapped with a 1 billion yuan fine. And Zhu Yong, the third defendant, was sentenced to two years behind bars with a three-year reprieve. He was told to pay 50 million yuan in penalties. The three men shared insider tips and connections to high-ranking executives, people with knowledge of the matter told Caixin.
Demonstrating he has learned from the most successful US hedge funds, Xu and the two investment firm managers were accused of colluding with senior executives of 13 listed companies from 2010 to 2015 to issue positive news about companies and even purchasing stocks in large quantities — all in a bid to boost prices and lure retail investors. The fund managers and executives then dumped their stock at the higher prices.
Between 2010 and 2015, Xu - either alone or with Wang and Zhu - colluded with the chairmen or the “actual controlling shareholders” of 13 listed companies to trade on insider information on topics such as dividends, according to the statement seen by Bloomberg. Xu controlled almost 100 trading accounts opened by his relatives, employees and employees’ relatives, the court said last year. The executives and owners have been charged separately.
The money involved and illicit gains from their manipulation was “especially huge, and the circumstances specially serious,” the court said without disclosing the amounts. They won’t appeal their sentences, according to the court.
The Chinese government has stepped up its crackdown on market irregularities after the stock market meltdown in the summer of 2015, in which the Shanghai index plunged more than 40% from mid-June to September. The sentence may have been prompted by China's desire to refocus the local population's attention on stock investing yet again, now that China's housing bubble has burst again.
Sources told Caixin that the three defendants poured 40 billion yuan raised through their wealth management operations to prop up stock prices. Considering the huge amount of money involved in the illicit trading, the sentence was lenient, said a criminal defense lawyer who spoke on the condition of anonymity. According to the country’s Criminal Law, a conviction for stock manipulation could result in a prison term of up to 10 years and a fine up to five times as much as the illegal proceeds.