By staff reporters Yu Ning, Yang Haipeng, Luo Changping and Fan Junli

One of the key members of China’s private financial empire, Yongjin Group, has gone into governmental custody, adding another chapter to a case that involves the suicide of Yongjin’s founding father and the detention of a former vice chairman of China’s securities regulatory body.

On August 29, law enforcement officers apprehended 43-year-old Liu Gang at the airport, in order to “assist investigation.” Liu — a high-level official at Yongjin and the chairman of Yunnan International Trust & Investment Co. (YITIC) — hasn’t returned home since then. Sources told Caijing that the investigation is linked to the death of Wei Dong, Yongjin’s chairman, and the case of Wang Yi, former vice governor of China’s Development Bank and deputy chairman of China’s Securities Regulatory Commission.

Liu was Wei’s right-hand man at Yongjin and has several billion yuan in assets. The story starts in 2001, when he went to southwest Yunnan Province to buy shares of YITIC from several shareholders. Two years later, Yongjin’s shares of YITIC bypassed the stake of Provincial Treasury Department and became the investment company’s largest stakeholder.

Months after his victory in Yunnan, Liu went to Chengdu and again used Yongjin’s subsidiary companies to buy shares of Chengdu Securities, which later changed its name to Sinolink Securities, and then went public in 2007 through a reverse listing. Yongjin’s shares of Sinolink, even in today’s bear market, are worth more than 6.5 billion yuan. 

In addition to dazzling deal-making, Yongjin seemed able to sense upcoming regulatory changes and move ahead of them. Its subsidiary companies bought non-tradable shares from Handan Steel (SSE: 600001) and Shanghai Pudong Development Bank (SPDB) at a bargain price in 2005. Soon the state regulator unveiled a reform plan that unlocked non-tradable shares, with the market value of tradable stocks many times that of non-tradable ones.

However, speculations swirl around Yongjin’s purchase of 40 million non-tradable shares of (SPDB). Caijing learned that major stakeholders of one seller have filed law suits.

It started in 2005, when State Assets Management Bureau’s Shanghai branch asked district offices and local treasury branches to sell their shares of SPDB to Shanghai International Group (SIG), a state-owned financial holding company. The move is to make SIG the largest shareholder of SPDB after the bank sold a 3.78 percent stake to Citi Bank. Citi is allowed to buy up to 25 percent stake of SPDB.

Prior to publicly announcing the state-coordinated sale, YITIC, the investment firm controlled by Yongjin, received insider information and bought 25 million shares of SPDB from a subsidiary company of SIG and another 14 million shares from China Pushi Electronic. The deal with Pushi was behind the scenes, not disclosed at a shareholder meeting and unknown to Pushi’s major stakeholders.

Caijing learned that YITIC paid a third-party company 3 million yuan to facilitate the purchase of SPDB shares. That third party company is owned by Xu Li, an old friend of Pushi’s general manager. Currently, major shareholders of Pushi have brought the case to the Shanghai Procurator and have filed several civil law suits, hoping the court can nullify the questionable selling of 14 million shares. So far the procurator hasn’t accepted the case, and the civil suits haven’t yielded any results.

Insiders told Caijing that Yongjin reaped a windfall for selling unlocked shares of SPDB, and then cashed most of the stocks at the peak of the market. 

1 yuan = US$ 0.14