Insurance scam

Ping An’s broking arm has been fined by the regulator for IPO fraud

For an industry that’s all about risk, there can’t be many brands more reassuring than Ping An. After all, its name means ‘safe and sound’ which is exactly the sort of message an insurance group wants to project.

But in the past week Ping An’s reputation for stability and harmony has taken something of a knock. That’s thanks to two high-profile debacles involving its brokerage unit and its trust company.

“Ping An isn’t ‘ping an’ at all,” commented Securities Times, referring to the incidents and the “big troubles” they’ve revealed. A weibo user concurred: “Ping An has been doing exactly the opposite of what its brand name tells us.”

The less complicated of the two situations – though almost certainly the more serious – centres on the activities of its investment bank, Ping An Securities. According to Securities Daily, the broking arm has been fined and severely reprimanded for its role in a fraudulent IPO. (As we reported in WiC192 this is a practice that the securities regulator, the CSRC, wants to stamp out before it reopens the market for new listings.)

The IPO in question was for Wanfu Biotechnology, which listed on China’s Nasdaq-like market ChiNext in September 2011. Ping An Securities sponsored the listing but didn’t do a very thorough job on its due diligence. Investigators from the CSRC have been in Hunan digging into the company’s books. In fact, so serious was the fraud that they feared for their own safety and almost got into a brawl with the firm’s management. Incredibly, they only got access to the real accounts after the provincial government intervened and sent in the police.

What they discovered was fairly jaw-dropping. Wanfu had begun falsifying its accounts as far back as 2008 as it prepared for its Rmb424 million ($69 million) listing. In the year it went public it claimed a net profit of Rmb60.3 million. The CSRC discovered it made just Rmb1.1 million.

Ping An Securities was then forced to hold a press conference to apologise for the fraud. On the instruction of the CSRC it announced the establishment of a “special compensation fund” for investors. The broker said that it would pay Rmb300 million into the fund to reduce some of the losses of those who purchased the dodgy stock. Ping An has also been suspended from underwriting new listings for three months, and fined Rmb76.5 million.

As Shanghai Securities News points out, this was an event of major significance for the Chinese capital market – it even likened it to “Neil Armstrong’s moon landing”. It was the first time an IPO sponsor had been punished for listing fraud. Beijing Morning Post added that it was the highest fine levied on a Chinese investment bank. Notably Ping An’s Shanghai-listed A-shares fell 5% last week, hitting a low for the year.

That led the state-owned newspaper to comment: “The Ping An ‘family’ is very unsafe recently.”

This observation was levelled in large part because of the broker’s unprecedented fine, but also because of widely publicised problems facing the insurer’s trust company.

The rights and wrongs of this case are less clear cut, but they have led to another reputational hit – with one retail investor drawing loud applause at an emergency general meeting after accusing Ping An Trust of inflicting huge losses on shareholders.

The story here begins back in late 2011, when Ping An bought a controlling stake in Jahwa Group, a cosmetics and households firm (for more about the company see WiC132). At that stage the Shanghai-based state-owned enterprise invited Ping An to be a white knight acquirer as it sought to fend off the advances of Hainan’s acquisitive HNA Group. Investors in its listed entity welcomed the move, as it was indicated that the insurer would finance a Rmb7 billion expansion into the luxury goods sector.

However, tensions soon flared between Jahwa’s longtime boss Ge Wenyao and the new owner, Ping An’s trust arm – which paid Rmb5.11 billion for its stake. As part of the envisaged move into luxury, Ge wanted to buy Seagull Watch last year. Contrary to expectations Ping An then vetoed the plan. Ge got angrier when Ping An sought to sell the Jahwa Financial Building in Shanghai and the Marriott hotel property in Sanya. He thwarted the move by calling in local officials from the state’s asset holding company, Sasac.

All-out war broke out between Ge and Ping An last week after the executive attacked the trust firm on his weibo. In a derisory tone he said it just wanted to sell Jahwa’s assets for short-term gains and was not helping to improve the company’s businesses.

The reason for his outburst? Ping An had just called an interim board meeting of Jahwa Group – which it controls – and fired him as chairman and CEO. According to the Global Times Ge was accused of embezzlement. Although this was denied by Ge, “this ugly incident won’t mark the last word in the feud that has been brewing between Jahwa and Ping An over the past year”, the newspaper noted.

That’s because Ge still remains chairman and CEO of Jahwa’s listed entity – of which the Ping An-controlled parent Jahwa Group owns only 28%. Unsurprisingly, the tension between management and its main shareholder have destabilised the stock, which lost Rmb5 billion of market value last Wednesday alone. It is this that provoked retail investors and other minorities to protest at Ping An’s behaviour.

In purely financial terms, Ping An may be acting rationally in seeking to realise gains from its investment. Nevertheless, as the South China Morning Post observes, the fracas has “cast doubt on the corporate governance of both companies”.

It has also drawn wider attention to Ping An itself, which the Economic Observer describes as a “unique financial conglomerate in China”. The insurer was founded in 1988 in Shenzhen, with shareholders including ICBC and Cosco.

Over the years it has achieved something that no other bank or insurer has managed, assembling licences in every area of the financial landscape. The insurer also has a bank, an investment bank, an asset management arm, and a trust company. The latter acts like a private equity fund, having assembled controlling stakes in 70 companies, according to National Business Daily (many of which are in real estate).

To have pulled this off, it’s speculated Ping An has powerful connections (a New York Times article last year alleged that its key shareholders included members of former premier Wen Jiabao’s family).

However, its never been clear how to best define Ping An’s status. China’s second largest insurer has been run by the influential Ma Mingzhe since 1994, but he does not have a controlling stake so it’s ambiguous whether it is a state-owned firm or a private one. When it listed in Shanghai in 2007 it described itself as a “commercial enterprise owned by all the people”.

This year Ping An is celebrating its 25th anniversary but its recent troubles may marr the occasion. The fact that Ping An was the first to be singled out by the CSRC for a fine (two other brokers were also suspended for IPO fraud) might even suggest that Beijing’s new guard wants to rein in this sprawling behemoth.

If so, less safe and sound times could be ahead for the company’s management.

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