The China Securities Regulatory Commission issued the number one fine in 2024, and Ruihua, the auditor of the "Kangde New Case", was fined 17.83 million!

Can Kangde's new shareholders see the light of day after 5 years of hard work?

Author | Small debt

Source | Bond Market Watch

The CSRC's first administrative fine every year is considered by the outside world to have a directional enlightenment, and will be interpreted by the media and the industry in multiple ways. But this year, because 2 days before the Spring Festival, Wu Qing replaced Yi Huiman as the 10th chairman of the China Securities Regulatory Commission, and the outside world has paid less attention to the first administrative fine issued by the former chairman of the Securities Regulatory Commission Yi Huiman in 2024.

In 2024, the CSRC's number one fine will be issued to Ruihua Certified Public Accountants (Special General Partnership), an intermediary involved in the Kangde Xin financial fraud case, with a total fine of 17.83 million yuan.

Source: CSRC official website

Although the number one fine is less popular than in previous years, Bronco Finance found that Wu Qing, the new chairman of the China Securities Regulatory Commission, and the "three fires" of the new official - the punishment of Shenwan Hongyuan Securities, Ping An Securities, and China Merchants Securities, can be said to be carrying forward the past and forging ahead into the future, and the regulatory thinking has not changed much.

Wu Qing, who was hailed by the media as the "butcher of brokers", first attacked two brokerages involved in bond underwriting and issuance violations on the second day of his tenure (February 8). Shenwan Hongyuan Securities Co., Ltd. (hereinafter referred to as "Shenwan Hongyuan") and Ping An Securities Co., Ltd. (hereinafter referred to as "Ping An Securities") were one ordered to make corrections, and the other received a warning letter.

On the third day (February 9), a fine was issued to the "ghosts" of China Merchants Securities for trading stocks in violation of laws and regulations. Administrative penalties were imposed on 63 people, with a total fine of 81.73 million yuan. Among them, one person was transferred to the judicial authorities on suspicion of insider trading, and one person was banned from the stock market for life. Huo Da, chairman of China Merchants Securities, who has management responsibilities, took administrative supervision measures such as issuing a warning letter and two then compliance directors, Zhao Bin and Hu Yu, taking regulatory talks. The Shenzhen Securities Regulatory Bureau will also conduct quarterly internal compliance inspections of China Merchants Securities from January to December.

It is worth noting that whether it is the punishment of Shenwan Hongyuan Securities, Ping An Securities, or China Merchants Securities, the detailed investigation was carried out during the period of Yi Huiman, the former chairman of the China Securities Regulatory Commission, and the results of the investigation were disclosed in an announcement after Wu Qing took office.

Moreover, whether it is the 2024 "No. 1 fine" issued by Yi Huiman, or the Shenwan Hongyuan Securities, Ping An Securities, or China Merchants Securities, which were punished by Wu Qing after taking office, they have a common identity - they are all important intermediaries in the securities market.

Since 2020, regulators, including the China Securities Regulatory Commission, have paid more and more attention to the "gatekeeper" responsibility of intermediaries.

In March 2020, the Criminal Law was amended to clarify that the sponsor is the subject of the crime of providing false supporting documents and the crime of issuing material misrepresentation of supporting documents, and the crime is applicable to criminal liability, which can be punished with a maximum sentence of 10 years in prison. On December 26, 2020, the Standing Committee of the 13th National People's Congress deliberated and passed the Amendment to the Criminal Law. Since then, there has been a clear improvement in the responsibilities and risk control requirements of intermediaries.

Judging from Wu Qing's experience as the director of the institutional department, the director of the risk disposal office, and the director of the fund supervision department of the China Securities Regulatory Commission, and a series of measures after taking office as the chairman of the China Securities Regulatory Commission, Wu Qing can only have higher requirements than his predecessor for consolidating the "gatekeeper" responsibility of intermediaries.

From this point of view, the number one fine of the CSRC in the New Year of 2024 is still of far-reaching significance.

01

"The first domestic-funded institute" Ruihua was heavily fined!

Ruihua was heavily fined, which brought great shock to the industry. Ruihua Law Firm is an accounting firm jointly established in 2013 by the former Zhongrui Yuehua and the former Guofu Horwath, which is considered to be the "first domestic firm" comparable to the "Big Four" (PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young) international accounting firms because it has served more than 370 A-share listed companies and more than 2,500 certified public accountants.

But in 2019, Kangdexin (002450. SZ stock code changed to 400102. SO) 10 billion fraud case was exposed, and Ruihua, the new audit institution of Kangde, also stood in the spotlight, and then Ruihua was placed on file for investigation, and dozens of IPO projects and refinancing projects in hand by Ruihua were affected and suspended. Ruihua's customers and employees have also lost to their peers.

The Shenzhen Stock Exchange has announced that it has found that from January 2015 to December 2018, Kangdexin inflated profits of 2.243 billion yuan, 2.943 billion yuan, 3.908 billion yuan, and 2.436 billion yuan from 2015 to 2018 through fictitious sales business, fictitious procurement, production, research and development, product transportation costs, etc., accounting for 136.22%, 127.85%, 134.19%, and 711.29% of the total profits disclosed in each annual report, with a total inflated profit of more than 10 billion.

The CSRC's No. 1 Penalty pointed out that when Ruihua audited Kangdexin's 2015, 2016 and 2017 financial statements, it failed to be diligent and conscientious, and the reports issued by it contained false records such as inflating operating income and total profits. Although Ruihua and the responsible person put forward 9 reasons for defense and requested exemption from administrative punishment, all of them were rejected. In accordance with the provisions of Article 223 of the Securities Law, the China Securities Regulatory Commission (CSRC) ordered Ruihua Certified Public Accountants to make corrections, confiscated 5,943,400 yuan of business income, and imposed a fine of 11,886,800 yuan; (2) gave warnings to Jiang Xiao and Qiu Zhiqiang, who were responsible, and imposed fines of 100,000 yuan respectively; (3) gave Zheng Longxing, who was responsible, a warning and imposed a fine of 60,000 yuan.

But it is very likely that Ruihua will not be able to pay the fine. According to the Shanghai Financial Court's enforcement ruling in September 2022, Ruihua has no enforceable property and has been restricted from spending.

In the years after the Kangde Xin case, every time Ruihua was on the news, it was "bad news".

On February 19, 2021, the Beijing Institute of Certified Public Accountants agreed to the abolition of the Party Committee of Ruihua Certified Public Accountants, and all the original party member organization relationships were transferred to the Party Committee of Beijing Guofu Certified Public Accountants. Almost at the same time, the Ruihua branch was also being deregistered.

In January 2023, the Beijing Securities Regulatory Bureau found that Ruihua failed to be diligent and conscientious in the audit of Haohua Energy's financial statements from 2015 to 2018, and the audit report issued by Ruihua had false records, and ordered Ruihua to make corrections, fined 7.45 million yuan, gave warnings to 2 certified public accountants, and imposed fines of 50,000 yuan each.

In June 2023, Ruihua was confiscated by the CSRC of 3.17 million yuan of business income and fined 6.34 million yuan for misstatement of financial statements and false records in the audit report of aerospace communications. The two signatory CPAs were also fined $100,000 each.

Source: Canned Gallery

Holding intermediaries accountable is exactly the right granted by the 2020 Criminal Law Amendment.

Song Yixin, a lawyer at Shanghai Hanlian Law Firm, analyzed that the 2020 Criminal Law Amendment has made great strides in the criminal sanctions for securities crimes. To sum up, there are four bright spots: First, the scope is broadened, that is, depositary receipts and other securities recognized by the State Council in accordance with the law are included in the scope of regulation, and new situations of market manipulation are also stipulated; second, the intensity of the punishment for crimes such as fraudulent issuance and information disclosure and falsification of information is greatly increased, from prison sentences to fines; third, the targets are highlighted, that is, the criminal responsibility of controlling shareholders and actual controllers is strengthened; and fourth, intermediaries are held accountable and the criminal consequences of sponsors and other intermediaries who are not diligent and diligent are consolidated.

In the future, the penalties, accountability and fines imposed by regulators and laws on intermediaries will become the norm, which also puts forward higher requirements for the practice level of intermediaries, so that intermediaries can become the "gatekeepers" of the securities market instead of "colluding" with the management of individual listed companies.

02

"100 billion white horse shares" Kangde Xin fell

The initiator of Ruihua's transformation from "the first domestic-funded firm" to "old lai" is the former "100 billion white horse stock" Kang Dexin.

Zhong Yu, the founder and actual controller of Kangdexin, was born in 1950 and is a native of Fuling, Sichuan. At the age of 38, Zhong Yu was in the midst of reform and opening up, and resolutely decided to go to sea to do business, initially reselling electric vehicles, and later entering the field of mechanical and electrical equipment. In 2001, Kangdexin was founded, and in 2002, the first pre-coated film production line in China was established. In 2010, Kangde Xin landed in the capital market, and its main business is the production and sales of pre-coated films and optical films.

So far, Kangdexin has been running wildly, and its revenue has risen from 524 million yuan in 2010 to 9.15 billion yuan in 2018.

The tide is rising, and Zhong Yu's personal wealth is also skyrocketing. In the 2018 Hurun Beijing Rich List, Zhong Yu ranked 35th with a wealth of 19.5 billion. At that time, whether it was Zhong Yu or Kang Dexin, they were all trendsetters of the times, standing on the waves and dancing in the wind.

Source: Canned Gallery

In 2017, Kangdexin's share price once hit an all-time high of 26.71 yuan/share (before the right to reset), with a market value of 94.6 billion yuan, approaching 100 billion yuan, an increase of 27 times, and was known as "China's 3M", "Huawei in the material industry" and "100 billion white horse stocks". According to Wind data, the company has raised a total of 27.879 billion yuan, of which about 9.425 billion yuan has been fixed and 12 billion yuan has been issued for bond financing.

It wasn't until 2019 that after Kangde Xin's first bond default, the real Kangde Xin was gradually exposed to the sun, and people were shocked that this "big white horse" was no longer what it used to be.

On January 15, 2019, Kangde Xin announced that the first phase of 1 billion yuan of ultra-short-term financing bonds was in substantial default, and there was uncertainty in the second phase of 500 million yuan of ultra-short-term financing. However, as of the end of the third quarter of 2018, Kangde Xin's current assets totaled 25.3 billion yuan, of which monetary funds were as high as 15 billion yuan. It is doubtful that there is a large amount of cash on the books, but it cannot repay the ultra-short-term financing bonds of 1 billion yuan.

Subsequently, the regulator filed a case for investigation of Kangde Xin, which stirred up a thousand waves with one stone, and the case of Kangde Xin's suspected fraudulent issuance of stocks and bonds thundered in the capital market. Soon, Kangde put on a new star and hat, and became *ST Kangde. In May 2021, Kangdexin was delisted and delisted and entered the Old Third Board.

According to the "Administrative Penalty Decision", Kangde Xin's cumulative inflated profits in the four years from 2015 to 2018 were about 11.53 billion yuan. There were also false records in bank balances. In 2018, the disclosed deposit balance was 14.468 billion yuan, of which 12.209 billion yuan was in the account balance of the Xidan branch of a bank in Beijing.

Source: Canned Gallery

The above-mentioned Ruihua Certified Public Accountants, which was heavily fined by the China Securities Regulatory Commission, sent a letter to the bank to check the balance, and the bank's reply letter showed: "The balance of the bank deposit account is 0 yuan, the account has a linkage account business in our bank, and the amount collected by the bank is 12.21 billion yuan." ”

The statements of the three independent directors of Kangde Xin, Zhang Shuhua, Yang Guangyu and Chen Dong, attracted attention, saying: Kangde Xin signed the "Cash Management Cooperation Agreement" with the major shareholder Kangde Group and the bank in violation of regulations, which caused confusion between the listed company and the controlling shareholder in the management and use of funds, and opened the door for the controlling shareholder to occupy the funds of the listed company.

However, when the funds of Kangde Xin's four bank accounts were collected in real time and in full into the bank account of Kangde Group, it was found that the actual balance of Kangde Xin's bank account in each year was 0. This is also the reason why Kangde Xin's "12.2 billion bank deposits disappeared", which was widely circulated in the market later.

At the meeting of bondholders of "18 Kangde Xin SCP001" on January 22, 2019, Zhong Yu, the actual controller of Kangde Xin, said that there is indeed a mix of funds between listed companies and groups. The occupation of the funds of the listed company by the major shareholders is mainly used to invest in carbon fiber projects and stock pledge to make up for positions. But later, during the criminal investigation stage, Zhong Yu changed his story and said that the funds were inflated and not occupied.

On May 31, 2021, the Suzhou Municipal People's Procuratorate filed a public prosecution with the Suzhou Intermediate People's Court in accordance with the law on suspicion of Kangdexin on suspicion of fraudulent issuance of stocks and bonds, fraudulent purchase of foreign exchange, Zhong Yu, Xu Shu, Wang Yu and others on suspicion of illegal disclosure and non-disclosure of important information, fraudulent issuance of stocks and bonds, and fraudulent purchase of foreign exchange. On December 23, 2021, the trial was held at the Suzhou Intermediate People's Court. But what is the verdict? There is no public information yet.

According to Time Finance, citing Zhang Yue, a lawyer at Beijing Jing'an Law Firm, Zhong Yu may be sentenced to more than 10 years in prison under the combined punishment of several crimes, while Dai Rui, a partner at Beijing Dongyuan Law Firm, believes that although there are many suspected crimes and the final punishment will be combined, it is difficult to judge which crime can be confirmed, and it is impossible to judge the final sentence.

On November 22, 2021, the Suzhou Intermediate People's Court accepted the bankruptcy reorganization of "Kangde Xin Compound", "Kangde Xin Optoelectronics" and "Kangde Field". In May 2022, it was decided in accordance with the law to carry out substantive merger and reorganization of three companies including Kangde New Compound.

The picture shows Kangde New Zhangjiagang Base Source: Canned Picture Library

03

Kangde New Investor has been defending its rights for 5 years

In the Kangde Xin case, the relevant responsible parties, whether they are the person in charge, the company, or the intermediary agency, seem to have made the fate clear: criminal detention, public prosecution, fine, bankruptcy reorganization, and deregistration...... However, there is another group - Kangde Xin investors, who have been struggling for five years and have not yet achieved effective results in protecting their rights.

Kangde New Investors believe that there are still two problems in the case that have not been clarified: 1. Zhong Yu's main problem is whether it is to occupy Kangde Xin's funds or to inflate revenue and profits, Zhong Yu's statement on this matter is inconsistent, and the investigation is not detailed enough.

2. Kangdexin had a deposit of 12.2 billion yuan in the bank at that time, and the bank involved issued a misleading false letter to Ruihua, and widely misled investors and society through the announcement, what should it be responsible for?

In addition, the investor mentioned that Ruihua, as an intermediary in the securities market, can be punished by the CSRC for negligence, while the bank is not under the jurisdiction of the CSRC. The responsibility of banks to mislead investors by issuing false letters may require the cooperation between the China Banking and Insurance Regulatory Commission and other relevant regulatory agencies and the China Securities Regulatory Commission to make the matter clear. It is hoped that Wu Qing, the new chairman of the China Securities Regulatory Commission, can promote this matter.

Since Kangde Xin has been delisted, the related companies have also gone bankrupt and reorganized, and the intermediary Ruihua has no property to enforce, who should recover from the damage suffered by investors? What responsibility should be borne by the major shareholders for the occupation of funds and the issuance of false letters by banks? This is directly related to the protection of investors' rights and interests in the future.

Source: Canned Gallery

In addition, it is understood that the progress of Kangdexin's shareholder's misrepresentation claim lawsuit is currently slow, many shareholders have not successfully filed the case, and there is a lack of securities rights protection lawyers representing Kangdexin's case. While the China Securities Regulatory Commission (CSRC) imposed heavy fines on Ruihua, the intermediary involved in the Kangde Xin case, how to promote investor protection is also another key point that needs to be paid attention to.

However, it is gratifying to note that judicial practice is improving on securities rights protection. In 2019, the Hangzhou Intermediate People's Court actively explored the representative litigation system for securities disputes in the "Wuyang Bond Case" and openly solicited litigation representatives from the public. On July 3, 2019, the Chengdu Intermediate People's Court also adopted the representative litigation mechanism in the VATS Cobalt and Nickel case.

Song Qinghui, a well-known economist, said that the representative litigation system is also suitable for the new Kangde case, which is a majority litigation system stipulated in the mainland's civil litigation to resolve group disputes and protect social and public interests. If the purchase of shares by small and medium-sized investors is a "crowdfunding" act of financing by A-share listed companies, then the representative litigation system is a "crowdfunding" for small and medium-sized investors to protect their rights. The increase in investors' awareness of rights protection through centralized litigation and the implementation of rights protection actions will inevitably have a deterrent effect on listed companies, especially those that have had a history of fraud, so that listed companies and companies to be listed do not dare to "do what they want". Therefore, in judicial practice, the class action system is a good thing for small and medium-sized investors, because it forces listed companies to improve the efficiency of operation and production, and at the same time is conducive to the improvement of the mainland capital market and the development of high-quality enterprises, which is worthy of further optimization and implementation.

What do you think of Ruihua, the "accomplice" of the CSRC's first fine this year?