The official website of the China Securities Regulatory Commission announced the details of the LeEco financial fraud case on April 13. LeEco has inflated revenue by 1.87 billion yuan in 10 years, and inflated profit by 1.73 billion yuan. Since 2007, LeEco has inflated revenue and profits, and the amount of inflated revenue has increased year by year. After being listed in 2010, LeEco continued to falsify. In 2015, LeEco’s inflated profits accounted for 516.32% of the total profits disclosed in the current period.
LeEco founder Jia Yueting and LeEco Finance Director Yang Lijie were banned from the securities market for life, LeEco executives Liu Hong and Wu Meng were banned from the securities market for 10 years, and Jia Yuemin was banned from the securities market for 8 years.
The China Securities Regulatory Commission stated that its determination of each false amount of LeEco is based on the combination of LeEco’s accounting vouchers, accounting data from customers, statements of the parties, testimonies from relevant witnesses, explanations of relevant companies, capital flow, industrial and commercial information, etc. Confirmed by comprehensive analysis of evidence. The China Securities Regulatory Commission fined LeEco a total of 241 million yuan and Jia Yueting a total fine of 241 million yuan.
LeEco and Jia Yueting, who were once a sensation in China’s Internet industry, ended up being fined and banned from entering the market after 10 years of fraud. Looking closely at the 24,000-character LeEco’s ten-year fraudulent experience announced by the China Securities Regulatory Commission, the fraud link is shocking.
Falsified started three years before listing
The story of LeEco’s rise began when it went public. At that time, the little-known LeEco Video surpassed Youku and Tudou, the first and second-largest in the market at that time, and became China’s first listed video company. Looking back now, the listing of LeEco was the origin of fraud.
LeEco was listed on the ChiNext in 2010, and the sponsor was Ping An Securities. LeEco was the first video website listed on the China Growth Enterprise Market at that time. LeEco’s prospectus at the time stated that its 2007 income was 36.91 million yuan, and its net profit was 14.69 million yuan, turning losses into profits. In 2009, the revenue was 134 million yuan and the net profit was 44.12 million yuan.
According to the investigation results of the China Securities Regulatory Commission, LeEco began financial fraud as early as 2007. In 2007, the inflated revenue was 9.3995 million yuan and the inflated profit was 8.7023 million yuan. The inflated profit accounted for 59.27% of the total disclosed profit in the current period; The increase in revenue was 46.155 million yuan, and the inflated profit was 43.0825 million yuan. The inflated profit accounted for 136.00% of the total disclosed profit for the current period. In 2009, the inflated revenue was 93.757 million yuan and the inflated profit was 88.831 million yuan. The inflated profit accounted for 186.22% of the total disclosed profit for the period.
Zhang Gang, a chief analyst at Southwest Securities, told the reporter that according to Chinese regulations at the time, the “Interim Measures for the Administration of Initial Public Offerings and Listing on the Growth Enterprise Market” stipulated that if the company suffered a loss in the past year, it would not meet the listing requirements. In 2009, LeEco announced a net profit of 44.12 million yuan. If the inflated profit of 88,831,800 yuan was subtracted, it was a loss that year and did not meet its 2010 listing conditions.
In terms of fraudulent methods, LeEco used its own capital circulation, fictitious business, and fraudulent collection of funds to inflate its performance to meet the conditions of listing and issuance. The fictitious methods mainly include: 1. Fictitious business through the company actually controlled by Jia Yueting, fictitious business with third-party companies, and inflated performance by constructing a false capital cycle through the bank account controlled by Jia Yueting. 2. In real business dealings with customers, inflated performance by pretending to be refunds.
In the three years before listing, LeEco made up 10 fictitious revenues through the companies actually controlled by Jia Yueting and 15 fictitious revenues through third-party companies. Six fictitious collections of revenues were made by pretending to be customers, including RMB 24,015,800 by pretending to be Unimov Advantage Technology Co., Ltd. and RMB 75,817,700 by pretending to be China Unicom.
Profits after listing mainly depend on “making up”
LeEco began to take off after the online market. The performance has achieved year-on-year growth. According to the financial report released by LeEco, its total operating income has increased from 599 million yuan in 2011 to 21.95 billion yuan in 2016, a 37-fold increase. With LeEco’s soaring income, LeEco’s share price has risen even higher, with a rise of 1505.97% after five years of listing. It used to be the No. 1 heavyweight stock on the Growth Enterprise Market, and its market value reached 150 billion yuan when it was at its highest.
However, according to the investigation of the China Securities Regulatory Commission, LeEco’s profits after its listing mainly rely on fraud, and fraudulent profits were made every year. In 2014, fraud profits accounted for as much as 93% of total profits. In 2011, LeEco reported a net profit of 131 million yuan, with an actual inflated profit of 65,291,300 yuan. In the 2012 financial report, the net profit was 194 million yuan, and the inflated profit was 84.451 million yuan. In 2013, the net profit was 255 million yuan, and the inflated profit was 193 million yuan. In 2014, the net profit was 364 million yuan, and the inflated profit was 342 million yuan. In 2015, the net profit was 573 million yuan, with an inflated profit of 382 million yuan. In 2016, the net profit was 555 million, and the inflated profit was 432 million.
LeEco’s revenue was also fraudulent. From 2011 to 2016, a total of 1.73 billion yuan in revenue was inflated. LeEco’s revenue fraud was mainly in the advertising business. From 2010 to 2016, long-term account receivables and fictitious business and accounts receivable with many companies such as Shanghai Jiushang Advertising, Beijing Lingji Technology, Shanghai Muji, Shanghai Hippo, Beijing Yimei, Guangzhou Vipshop, Shanshui Wenyuan, etc. The purpose of inflating income.
In addition to using its own funds to recycle and collude to “pass through” fictitious business income, LeEco also continued to inflate its performance by forging contracts, failing to actually implement framework contracts or unilaterally confirming swap contracts.
For financial fraud, LeEco also involved failure to disclose related party transactions in accordance with regulations. On April 17, 2017, LeEco transferred 210 million yuan to its wholly-owned subsidiary Chongqing LeEco Microfinance Co., Ltd. in the name of “capital increase”. After receiving the above 210 million yuan, LeEco’s small loan immediately divided into 7 loans in the name of each loan. The 30 million yuan was transferred to 7 LeEco affiliated companies. After receiving the funds, the above 7 companies transferred all the funds to LeEco Holdings on the same day.
The final result of the borrowing mystery
The China Securities Regulatory Commission also announced the punishment results for Jia Yueting’s repeated reductions in holdings and cashing out of loans called LeEco, but failing to fulfill his promises. Jia Yueting once said, “All the funds I can mobilize, I will put all into the ecology and dreams.” However, according to the investigation of the China Securities Regulatory Commission, Jia Yueting’s disclosure of “complying with the promises made” was not consistent with the facts, and it was sufficient to cause major misleading to investors.
From June 1, 2015 to June 3, 2015, Jia Yueting reduced his holdings of approximately 2.5 billion yuan in stocks through his Huatai Securities account. After sorting out the flow of funds, Jia Yueting’s reduction of 2.6 billion yuan of funds only 630 million yuan remained in LeEco, and the rest went to Jia Yueting’s control account. From June 15, 2015 to May 10, 2017, LeEco made multiple loans from Jia Yueting, but they were frequently withdrawn and failed to fulfill their commitments.
From June 15, 2015 to November 15, 2016 (after November 15, 2016, Jia Yueting did not continue to provide loans to LeEco), during the period LeEco borrowed from Jia Yueting in total 11.344 billion yuan. From June 29, 2015 to May 10, 2017, LeEco repaid a total of 46 loans from Jia Yueting, with a total of 11.344 billion yuan in repayment.
The public commitment disclosed by Jia Yueting and Jia Moufang was to lend the reduced funds to the listed company for 60 months (later changed to 120 months), but in fact, the relevant reduced funds were temporarily lent to LeEco and were withdrawn. The China Securities Regulatory Commission believes that the then chairman Jia Yueting violated his promise and directly instructed the relevant personnel to withdraw his and Jia Moufang’s loans without diligence and due diligence. He was the person in charge who was directly responsible for the false records and major omissions in the relevant disclosure documents of LeEco. As the actual controller of LeEco, Jia Yueting instructed relevant personnel to engage in the above-mentioned illegal acts, which constituted the illegal acts described in Article 193, Paragraph 3 of the Securities Law.
Ten years of “cat and mouse game”
LeEco was fined 241 million yuan for 10 years of fraud. The party involved in the fraud, Jia Yueting has been on the list of dishonest people in China many times, was restricted from high consumption, and was fined 241 million yuan, and was banned from the securities market for life.
In 2017, LeEco’s fraud story was exposed, and the company lost 13.8 billion yuan that year. Since then, losses have continued, with a cumulative loss of nearly 30 billion yuan in three years. On June 5, 2020, LeEco entered the delisting consolidation period. It closed at 0.18 yuan per share on the last trading day of A-shares, leaving only 718 million yuan in total market value. The trauma left by LeEco investors, creditors, suppliers, and investors in the past still exists.
As a large company that used to have a lot of beauty and was under the spotlight, why has LeEco been undetected for ten years of fraud? Zhang Gang analyzed that general financial fraud is collusion between internal and external companies and concealed and deceived the regulatory authorities. If there is no report from insiders, it will be difficult for outsiders to detect fraud and obtain evidence.
“Even in the mature markets of Western countries, it is difficult to completely eliminate similar incidents. There have been large-scale incidents such as Enron fraud.” He said that for financial fraud, whether it is the regulatory agency or the media industry, a comprehensive three-dimensional battle is required. For example, Western countries have a system of high rewards for whistleblowers, which will play a certain role. “It’s like a cat and mouse game.” It is an ideal state to eliminate company fraud. But in reality, it is difficult. In reality, discovering and investigating companies that fraudulently deal with fraudulent companies may be an eternal task.
Source: Economic Observer