By staff reporters Yang Haipeng, Luo Changping,intern reporter Chenzhong Xiaolu

In an apartment in the Luwan district of Shanghai, an old couple has saved a well-worn newspaper dated July 27, 2007. The headline reads, “China's Central Commission for Discipline Inspection Answers Reporters on Chen Liangyu’s Serious Violation of Principles.” 

“We know nothing more than what was printed in the paper,” said the husband, Chen Genghua, an 86-year-old retired engineer, as his wife, Li Mouzhen, bears a look of sadness and distress.

The person mentioned in the headline is Shanghai’s disgraced former party secretary, who has been embroiled in a multi-billion yuan pension fund scandal. Chen is also the eldest of the couple’s three sons.

The once powerful party head of Shanghai was stripped of all public and party posts, and has been held in Beijing since September last year while the investigation continues. After 10 months, the party disciplinary watchdog provided more details about the investigation into Chen’s actions, sending a signal that the massive pension fund scandal is beginning the judiciary process. It's about time for this historic case to come to a close. 

The Conclusion  

On July 24, the Shanghai People’s Congress stripped Chen Liangyu of his membership in the National People’s Congress, China’s top legislative body, along with his membership in Shanghai People’s Congress.

Two days later, the Politburo of the Central Committee of the Communist Party of China (CPC), the party’s senior leadership council, reviewed a document named, “A report about Chen Liangyu’s severe violation of principles”. Drafted by the Central Commission for Discipline Inspection, the report was built on a preliminary version composed in September, 2006. After 10 months’ work, the new report divulged far stronger allegations than its predecessor in terms of both scope and severity.

According to official Xinhua News Agency, Chen is thought to have been involved in the misuse of the Shanghai social security fund, which is under the authority of the Shanghai Labor and Social Security Bureau, assisting businessmen to make illicit profits, protecting aides and associates who severely broke the law, and of abusing his power by engaging in nepotism.

For the last two decades, Chen climbed up the political ladder step by step, going from party chief the of Shanghai Huangpu district to the mayor of Shanghai and eventually party secretary, before finally entering the powerful Politburo. The new report brought out in July listed Chen’s six major wrongdoings: 

1.      Supporting the Shanghai Labor and Social Security bureau in doling out massive amounts of pension funds to unlawful entrepreneurs and related companies, hence jeopardizing the safety of the pension funds.

2.      Assisting businessmen in illegally acquiring rights to purchase shares in state-owned enterprises, and causing substantial losses in state assets

3.      Abusing his public positions and influence to secure profits for relatives, friends, and aides during the process of approving projects, allocating financial resources, unfairly recruiting businesses, making unlawful rulings on land use applications and handing out official appointments.

4.      Helping relatives make illegal profits in their business operations.

5.      Using his public position to secure sexual favors.

6.      Protecting his aides and associates after they had committed serious discipline violations. 

On July 26, the day following the announcement of Chen’s “double expulsion” (he was expelled from both the party and government), the Xinhua News Agency disclosed the details of the Shanghai Pension Fund Scandal in an interview with Xia Zanzhong, associate secretary of the CPC Central Commission for Discipline.

In early August, officials from the party disciplinary committee confirmed that the judiciary process had already begun for Chen’s case. Caijing has learned that the former Shanghai political boss will face charges of bribery and abuse of power; the only good news for his grief-stricken parents was that a disciplinary official on August 2 declared that their son was in good health..

A week before the report made public, some local officials visited Chen in Beijing to inform him of his ousting from the party roster, his first visit by officials from his home town since he was detained in last year. The members of the delegation reported that he looked healthy.

The Cast

In fact, Caijing discovered that the investigation was had already approached the final stage in early June.  A dozen government officials and senior business executives are currently implicated in the scandal and are awaiting trials in three different locations: Shanghai, Jilin province and Anhui province

Cai Zhang, chief justice of the Jilin Provincial People’s Supreme Court, informed Caijing that the CPC Central Commission for Discipline and the People’s Supreme Court had decided that some preliminary trials would be held in the Changchun Intermediate People’s Court, with the final trials set to be held at provincial level high courts.”

Over 20 people have been implicated in the scandal, including Chen’s cronies, loyal aides, power brokers and market rainmakers, each of them acting as a cog in the machinery of corrupt politics. Details emerged gradually, uncovering two core platforms--the Shanghai Pension Fund and Shanghai Electric Corp.--and a whole cast of players, ranging from public officials to high executives using clandestine methods to channel money in exchange for power and favors.

In an interview with the Xinhua News Agency, Xia Zanzhong, of the Central Commission for Discipline Inspection, outlined Chen’s case and the investigation. According to Xia, the investigation started with the pension fund.

On July 5, 2006, the Central Commission for Discipline, together with other government agencies, opened an investigation into the Shanghai Municipal Bureau for Social Security. On July 17, Zhu Junyi, former director of the Shanghai Municipal Bureau of Social Security, was held under shuanggui, or “double regulations” (an extra-legal disciplinary measure in which party member may be detained and interrogated).

In an internal circular, the CPC Shanghai Municipal Committee claimed that Zhu had violated financial regulations by using pension funds for illegal investments. Only six days later, Fuxi Investment Holdings Co. published a public notice revealing that the firm’s president, Zhang Rongkun, was cooperating with the government investigation.

Zhu and Zhang’s involvement led to more links and allowed more forays into the massive pension fund scandal that would rock Shanghai’s political nerve center.

The Mysterious Highway Baron  

Zhang Rongkun’s rise to fame started back in March 2002. At the time, this unknown businessman had just used his new born Fuxi Investment to snap up 3.2 billion yuan, or 99.35 percent, of the shares in the Shanghai Roads and Bridges Developing LTD (SRBD), held by the Shanghai General Municipal Construction Ltd.

The acquisition of SRBD, which secured 30-year management rights to the Shanghai section of the Huhang Highway, sent shockwaves through Shanghai. It was only a start.  By the end of June 2005, it had gained highway management rights to a total of 200 kilometers, winning Zhang the nickname “Highway Baron” among industry players.

It has since emerged that the funds used to buy the SRBD shares came mainly from a huge trust fund managed by the Shanghai branch of the Industrial and Commercial Bank of China (ICBC), where the trustee was the Shanghai Enterprise Annuity Development Centre, a subsidiary of the Shanghai Municipal Bureau for Social Security controlled by Zhu Junyi. In other words, Zhang’s bid had been covered by public pension money.

On the morning of January 30, 2007, Shanghai Mayor Han Zheng reported the misuse and path of recovery of the Shanghai Pension Fund to the Shanghai People’s Congress.  Han dated the first misappropriation of funds back to the fourth quarter of 2002, speaking of seven embezzlements worth 3.45 billion yuan in a two-year span. Zhang Rongkun, president of Fuxi Investment, received the funds as trust loans. On January 17, 2007, the embezzled funds, principal and interest totaling 3.7 billion yuan, were fully recovered.

Caijing discovered that earlier this year, “administrative measures” were launched to deal with holdings under Zhang Rongkun's name, including investments in public companies, financial institutions andbonds.  Following the restitution of the money to the pension funds, bank debts and unpaid dividends, Zhang’s company was left virtually bankrupt.

Sources close to the prosecution revealed that Zhang will stand trial mainly for counts of bribery and fraud in issuing corporate bonds.  It was bond issuances fraud that led police to first level charges against him on July 18, 2006.

The fraud in question refers to the concealment of material facts and the spreading of false claims to produce fund raising materials such as prospectus and shareholder manuals, and when the amounts are substantial, with serious results or consequences.

Fuxi Investment’s involvement in this crime stems from March 6, 2006, at which time Fuxi Investment failed to disclose in its investment brochures that Zhang Rongkun had loans totaling over [3.4 billion yuan in pension funds], while further issuing year-long, 1 billion yuan in short term bonds to banks, with ICBC as the lead underwriter.

Other financial data obtained by Caijing revealed that ICBC was Fuxi Investment’s largest creditor.  Since 2002, Fuxi Investment had garnered loans topping 6 billion yuan from ICBC’s Shanghai branch, with its two most profitable assets being Fuxi Investment’s management rights in the Huhang tolled Super Highway (Shanghai section) and the Jiajin tolled Super Highway, both taken by ICBC as long term collateral, totaling 4.73 billion yuan.

Though Zhang was already buried in debt, he did not disclose this and opted to issue 1 billion yuan in short term bonds, becoming one of the first non-listed private entrepreneurs to issue this kind of public bond.

Zhang will look to well-known Beijing lawyers Xu Lanting and Qian Lieyang for his defense with Xu telling Caijing that the trial would take place in Jilin at an undetermined date.

Sources close to the prosecution further revealed that Zhang was a key figure in the Shanghai Pension Fund scandal, with more than 10 targeted officials in his little black book of recipients for gifts and bribes.

The Networkers 

Zhang can attribute his success to a hard-core network of allies.

In July this year, Wang Weigong, the deputy manager of Shenergy Group, was detained as the person responsible for introducing Zhang Rongkun to Shanghai. Sources revealed that Wang was arrested for his involvement in the pension fund scandal and after being summoned to Beijing for questioning as the investigation picked up steam.

Wang was secretary of the general office of the Shanghai party committee, and served as the secretary to leading members of the committee before receiving a promotion to secretary of a senior central leader of the State Council. In early 2007, Wang returned to Shanghai and settled at the Shenergy Group, but still maintained his political advantages.

Rubbing shoulders with well-connected officials such as Wang, Zhang gathered enough clout to make a difference in Shanghai.

Caijing was informed that Zhang’s black book of bribes included Zhu Junyi, former director of the Shanghai Municipal Bureau of Social Security, Qin Yu, former deputy secretary of Shanghai’s Baoshan District and Sun Luyi, former chief director of the Shanghai CPC Municipal Office. The four are all under investigation by Jilin Provincial prosecutors.

In fact, Qin Yu, a smooth operator familiar with Shanghai official circles, allowed Zhang, the business executive, and Zhu from the social security bureau. Qin and Zhang both graduated from East China Normal University, with an approximate 10-year gap in age. When Zhang was obtaining his masters degree, Qin was already working as a lecturer there. Following the implication of Zhang and Zhu in the scandal in 2006, Qin lost his office as Baoshan District chief on August 25 that year, barely a month after his inauguration.

Qin’s fall was followed by that of Sun Luyi, then director of the CPC Shanghai Municipal Office. Sun was also suspected of “taking bribes,” likely from Zhu Junyi. Aged 54, Sun came from a scholarly background, and had been vice president of the Shanghai Administration Institute, deputy director of the Organization Department of Shanghai’s CPC Committee, and chief of Shanghai’s Human Resources Bureau. He had been in his current post since February, 2004.

The chain of investigations unveiled ever-deeper levels of deceit and corruption. When Sun was questioned by party officials, the Hong Kong Commercial Daily published a story under the headline, “Chen Liangyu’s House Keeper is Under Double Regulation.”

Another Prong

As the pension fund scandal unfolded, another case engulfed the Shanghai Electric Corp, with some of its executives to be tried in Jilin.

Zhang Rongkun, the highway baron, again played a key role in the Shanghai Electronic case. Since 2004, the electronic company, along with its controlling Hua An fund, had become an important tool for Zhang Rongkun. 

Back in 2004, two private companies became surprisingly involved in the restructuring of the state-owned Shanghai Electronic Group Ltd. (later Shanghai Electronic Group Ltd. Co.). They were Fuxi Investment and Shangtou Mingguang. Fuxi became the second largest shareholder, and its owner, Zhang Rongkun, was named the chairman.  Mingguang took a 4.4 percent stake in Shanghai Electronic, with an investment of 400 million yuan. Going public on the Hong Kong exchange in April 2005, Zhang’s shares rocketed to 1.6 billion yuan right after the IPO.

The source of Fuxi’s funds aroused suspicions. According to the claim filed with Shanghai First Middle Court, Fuxi borrowed money from Shanghai Electric to buy the company itself.

Fuxi’s 2004 books registered Shanghai Electric as owning 10.54 percent, worth 963.5 million yuan. Meanwhile, the first phase of Fuxi’s investment into Shanghai Electric was 500 million yuan, and the second injection for Shanghai Electric’s equity was 463.5 million yuan.

Not surprisingly, Fuxi’s downfall also brought down several Shanghai Electric executives. In the summer of 2006, Wang Chengming, chairman of Shanghai Electric, and Vice-Chairman Han Guozhang were both investigated.

Actually, it seemed that the ties between Zhang and Wang ran deeper still. Caijing discovered that an investment company controlled by Zhang Rongkun owned shares in the Hua An fund, which was managed by Wang Chengming.

Another Zhang-owned asset, Shanghai Feidian Investment Development Ltd., joined four other companies to split Hua An’s shares evenly. The other four companies were Shanghai International Trust Company, Shanghai Electric, Shanghai SVA Group Ltd., and Shanghai Industrial Investment (Group) Ltd.

Another Shanghai Electric shareholder would also come under the investigation’s spotlight. Li Songjian, chairman of the Mingyuan Group, joined Fuxi to buy 4.44 percent of Shanghai Electric, with a total of 400 million yuan in 2004.

In January this year, Li was ousted from Shanghai’s Political Consultative Conference. A circular stated that Li, along with Shanghai Electric Vice-Chairman Han Guozhang, were suspected of diverting 50 million yuan of Shanghai Electric funds to invest in the same company. He violated criminal law, and was consequently arrested by the Jilin Procuratorate.

Loyal Aides 

In the final report composed by the Central Disciplinary Inspection Commission, Chen faced accusations of taking massive bribes, as well as nepotism, leading to him and his relatives securing illicit benefits. Although precise details of his graft remain unknown, sources have mentioned two numbers, both sizable: 2.63 million yuan, and 4 million yuan.

An attendee of the internal meeting mentioned several names that were involved in Chen’s case, including Wu Minglie, former chairman of New Huangpu Group, Chen Chaoxian, chief of Shanghai Changning district, and Wang Zheng, vice-Chairman of Shanghai Huawen Media Holding Company.

The three persons above all mirrored Chen’s move from Huangpu district to the city’s power nexus. Wu was a community environment and health official, while Chen used to be a hotel manager. When Chen Liangyu was district chief of Huangpu, they all gravitated to become his close friends and loyal aides, known as “the gang of Huangpu”.

Chen Chaoxian became a member of the Standing Committee of the Huangpu Party Committee, and was named the Changning district chief in 2003.

In May 2007, Chen was under judiciary investigation. Public reports said he reaped huge profits in return for favors. Yet, in 2005, this corrupted mandarin was held up by Chen Liangyu as a model for other Shanghai officials to emulate. He was even the subject of a documentary to be studied by Shanghai party members.

Wang Zhen, another crony implicated in Chen’s investigation, used to work as vice-chairman of the Huawen group, which borrowed 1 billion yuan from Shanghai Enterprise Annuity Management Center. Wang went down last year for his involvement in the pension fund scandal.

In early 2005, a local agency that oversaw Huangpu district’s state assets inked a deal with Huawen that saw the latter purchase a 75 percent stake in the New Huangpu Group. By the end of the year, Huawen bought another 18.18 percent at 425 million yuan from the state assets management agency, thus cementing its position as the fledgling New Huangpu’s largest shareholder.

The Huangpu Company held many lands in the Huangpu district, a perfect platform for Huawen to extend its real-estate ambitions.

Wang Zhen was the then vice-chairman of Huawen, and the chairman of New Huawen. Wu Minglie was both the chairman of New Huangpu and New Huangpu Real Estate Company, but he abdicated these two posts to Wang Zhen after the transaction was concluded. 

It’s unclear where Huawen secured the money to invest in Huangpu. Sources said Huangwen received 1 billion yuan from Shanghai Enterprise Annuity Management Center and returned the sum after the pension fund scandal erupted.

Another power connection of Huawen was even stronger. Chen Liangyu’s only son, Chen Weili, was given a generous offer by Wang Zhen to work at Huawen’s holding company. Running a media company and one of Huawen’s subsidiaries in Hong Kong, Chen Weili departed for America last September, although many sources say he has returned to China.