Carlyle's China Problem: Simply About Questions For David Rubenstein

I have got spent considerable fourth dimension pondering dumb deals done past times post that suggested that Carlyle's dumb-deals powerfulness live the start of the undoing of the mainland People's Republic of China individual equity concern generally.

But I have got spent to a greater extent than fourth dimension wondering why Carlyle does naught to patch what volition shortly live a sinking ship.

My post (Guanxi vs Analyst) prompted the solely world answer I have got always induced from Carlyle - when the Carlyle Managing Director David Rubenstein dismissed my concerns in the Financial Times. To quote the FT:

David Rubenstein, co-founder of Carlyle, the U.S. of America individual equity group, has striking dorsum at critics of ii troubled Chinese investments, arguing that the amount involved is “insignificant” compared with its $3bn investments inward Asia’s biggest economy. 

Mr Rubenstein, 1 of the world’s best-known individual equity bargain makers, told the Financial Times that he was “extremely happy with our investments inward China, as well as I wishing nosotros had to a greater extent than of them than nosotros have”. 

The disputation over the Chinese companies, which have got been defendant of fraud as well as suspended from trading inward Hong Kong as well as New York, is potentially embarrassing for Carlyle every bit it prepares for a planned initial world offering. 

I was a niggling off-put when David Rubenstein dismissed my concerns arguing the amounts involved were "insignificant". Mr Rubenstein has never responded to my (repeated) emails as well as I cannot tell whether he is cocooned from negative exterior opinion.

Bluntly, I mean value David Rubenstein was ill-advised particularly regarding mainland People's Republic of China Agritech - only also mayhap regarding other investments that Carlyle has made. The amounts of coin may live "insignificant" only the loss tin live pregnant inward other ways.

This post gives some background to the loss at mainland People's Republic of China Agritech as well as asks Mr Rubenstein whether he stands past times the thought that the loss was "insignificant" as well as whether he would live prepared to say so (in lite of information presented) inward a alphabetic quality to his clients.

Background to the mainland People's Republic of China Agritech loss

By manner of background I wishing to extensively quote an article inward the British Journal of Criminology titled Beyond Social Capital: Triad Organized Crime inward Hong Kong as well as China. Underlined sections are my emphasis.

The case is almost how the leader of Dominicus Yee On [a major organized criminal offense group], Jimmy Heung, used the social working capital alphabetic quality he developed inward mainland People's Republic of China inward the 1990s to commit an organized ‘financial crime’ inward Hong Kong (though it was non proven inward court). In this case, Jimmy’s society (Win’s Prosperity Group) as well as a Hong Kong Stock Exchange-listed society (China Prosperity Holdings) joined hands to manipulate the cost of the listed society inward the stock market. This example evolved through dissimilar phases betwixt Apr as well as Oct 1999, as follows.

Phase 1: Accumulation of shares past times ringleaders as well as associates (April to August 1999) 

This example began with the renaming of a listed construction company, OLS Group, as China Prosperity Holdings (CPH) on 29 Apr 1999. Coincidentally, both the Chinese and English linguistic communication words for ‘Prosperity’ were the same every bit inward Jimmy’s company, Win’s Prosperity Group. Jimmy Heung as well as a Mr Tang were the solely directors of Win’s Prosperity Group. Tang was also the Executive Director of CPH, only Jimmy, every bit a triad figure, is non allowed to grip directorship of whatever listed company. It is assumed that both companies were actually nether Jimmy’s control. Between Apr as well as August 1999, the masterminds of the crime had gradually accumulated the shares of CPH at a real depression price, ofttimes below HK$1 (US$1 = HK$7.8). After the accumulation, the ringleaders leaked ‘privileged’ sensitive information to their associates almost favourable cost movement of CPH so that the associates would rush to purchase in. In the start calendar week of September 1999, CPH soared 35.39 per cent to around HK$1.53 on viii September...

Phase 2: Leaking of intelligence to the volume media (mid-September 1999) 

In Phase 2, a rumour almost CPH was leaked out to selected volume media, which drew the attending of ‘smart guys’ to purchase the company’s shares ahead of other investors. The rumour was almost CPH’s entering into a conditional understanding to teach a 33 per cent indirect stake inward Jimmy’s Win’s Prosperity Group, which was to prepare a Century Vision Network (CVN) projection that would capture 200,000 subscribers inward the start twelvemonth of functioning as well as 100 1000000 subscribers within 10 years inward China. There was also a rumour that CPH would displace into into a articulation venture with a state-owned company inward China. The rumour also said CPH would invest almost HK$780 1000000 inward this project, only nosotros discovered that the company’s unaudited effect for the 6 months ending xxx June 1999 was solely a turnover of HK$60.50 1000000 (CPH society proclamation on ix Oct 1999). As the rumour spread, the ‘smart guys’ who got the ‘privileged’ information bought upwards the shares rapidly and, consequently, the cost soared inward a brusk menstruum of time, drawing to a greater extent than percentage hunters to purchase inward alongside its profitable investments. Overall, betwixt 2 as well as 24 September 1999, the Hong Kong Hang Seng Index dropped 3 per cent, only the percentage cost of CPH increased past times 238 per cent (CPH society proclamation on ix Oct 1999).

Phase 3: Company directors’ exercise of percentage options (17 September 1999) 

As the percentage cost rose sharply, the society directors capitalized their gains by exercising their percentage options as well as this do is absolutely legal. In total, 3 1000000 new shares were allotted to an employee of CPH on 17 September 1999, as well as 10 million, 3 million as well as 1 1000000 novel shares were allotted to iii directors of CPH on 24 September 1999, at an exercise cost of HK$0.16 per share, pursuant to an exercise of percentage options previously granted to them (CPH society proclamation on ix Oct 1999). Jimmy’s partner, Tang, personally held 10 1000000 novel shares. On 24 September 1999, CPH closed at HK$5.05, as well as was traded betwixt HK$5.0 as well as HK$6.0 most of the time. That is, the directors could have got earned HK$48.9 million, HK$14.67 1000000 as well as HK$4.89 million, respectively, inward this menstruum if they had sold all their shares.

Phase 4: Suspension of trading awaiting society announcement (25 September to ix Oct 1999)

In Hong Kong, a society leaking share-price-sensitive information or having unusual trading activities may live requested to suspend its percentage trading. On ix Oct 1999, the Hong Kong Stock Exchange warned that the Exchange was concerned almost companies that were leaking information to certainly intelligence media instead of making public announcements so every bit to increment investor enthusiasm for their shares. These companies should unloose the information necessary to enable investors to appraise them inward order to avoid the institution of a imitation market. In Hong Kong, if the leaked information is inconsistent with what is announced formally later, the acts may live inward breach of the Securities Ordinance. 

CPH was requested past times the Stock Exchange to suspend trading on 25 September 1999. On ix Oct 1999, CPH was forced to brand a world announcement, mentioning a joint venture, through Jimmy’s Win’s Prosperity Group, with China’s Telecommunications Bureau as well as State Administration of Radio, Film as well as Television (SARFT). It said the Win’s Prosperity Group had entered into a non-binding understanding to operate the venture with the Telecommunications Bureau, a SARFT subsidiary as well as other unnamed partners. Under the agreement, Win’s Prosperity Group would grip 33 per cent of the venture, while the Telecommunications Bureau—which controls mainland People's Republic of China Telecom—and the SARFT subsidiary each would have got 10 per cent interests. CPH said a lastly understanding was expected to live reached past times the terminate of October. The next is component of the public announcement:

The CVN Project is inward the evolution stage as well as may or may non materialise. WPGL [the Win’s Prosperity Group] has entered into ii Letters of Intent for the role of launching the CVN Project inward the People’s Republic of mainland People's Republic of China (PRC). It is unclear if the construction volition live changed or not. In addition, WPGL may or may non displace into into formal agreements with the PRC telecom partner to arrange for the usage of the telephone networks or with the PRC broadcast partner to obtain the approvals for the content to live broadcasted past times CVN via the telephone networks inward the PRC. As the Letters of Intent entered into are non-binding as well as commercial negotiations are silent beingness conducted and are non finalised, it is possible that the construction laid out inward the Letters of Intent could live changed. It is also uncertain whether a formal understanding volition finally live reached. If no formal understanding is reached, the CVN Project may non live launched inward the PRC. (CPH society proclamation on 9 October 1999).

As shown inward the announcement, Jimmy’s Win’s Prosperity Group had signed ii non-binding agreements with a Chinese telecommunication company. Two points are worthy of advert here. First, it was real hard as well as extraordinary for a relatively pocket-size Hong Kong society to displace into into an understanding with a giant Chinese state-owned enterprise. The Hong Kong businessman, inward this example Jimmy, ought to have got had outstanding social capital for this articulation venture to materialize. Second, real astutely, since these were non-binding agreements, the bargain could disappear all of a abrupt without whatever cause.

Phase 5: Selling of shares past times insiders (11–13 Oct 1999)

When the percentage cost of CPH stood at a high level, the society made a public announcement on the possibility of a profitable venture, which, however, could non be verified immediately. The proclamation triggered panic buying past times the full general public and trading book soared extraordinarily, only it was fourth dimension for the ringleaders and associates to sell their accumulated shares. When CPH resumed trading on eleven October 1999 after the announcement, its percentage cost jumped 32.02 per cent to $5.05 from its previous closed on 24 September. This provided the syndicate with a timely opportunity to sell their shares. The adjacent day, 12 Oct 1999, CPH slid 11.38 per cent to $4.475 in heavy trading, suggesting that some investors were actively selling the shares, with insider knowledge that something powerfulness come about real soon.

Phase 6: The collapse of the percentage cost (14–20 Oct 1999)

When the percentage cost of a society is inward a panic-buying or selling stage, the government’s watchdog volition stride inward as well as asking the number to live clarified. The Securities as well as Futures Commission of Hong Kong challenged the $20 billion valuation of the articulation venture as too high, as well as pointed out that such a venture would non live able to circumvent China’s restrictions on communications investment past times unusual companies. The Commission also warned Earth through the volume media:

Unequal dissemination of price-sensitive information could Pb to insider dealing as well as the possible formation of a imitation or misinformed marketplace for these shares . . .. Large changes inward prices or turnover may also bespeak that at that spot is a imitation or misinformed marketplace . . . [and the] world may live at peril and suffer loss because they tin solely merchandise on the footing of wrong or incomplete information. (South China Morning Post).

The watchdog contacted the mainland Chinese partner to verify the status of the proposed venture because CPH had refused to furnish information almost the progress of negotiations. Five days after the society announcement, on xiv Oct 1999, CPH suddenly announced that the mainland articulation venture was aborted, proverb that Jimmy’s Win’s Prosperity Group had terminated negotiations with its mainland partner. With the excuse of commercial secrets, CPH declined to reveal the reasons behind the termination, as well as whether the Commission’s investigation had led to it.  

After the announcement, the percentage cost of CPH plunged 31.84 per cent on the first trading day, 26.22 per cent on the minute 24-hour interval as well as some other 12.88 per cent on the third day. The company’s percentage cost surged to HK$5.05 after the proclamation of the joint venture only collapsed 61.18 per cent to HK$1.96 after the outcome of the negotiations, very around its cost earlier the early on September rally (see Figure 2). To permit the public forget its past times devious dealings, non surprisingly, CPH changed its hollo to Prosper eVision Limited a few months later, on v June 2000. No 1 was prosecuted inward the end. Moreover, the introduce written report has non identified whatever evidence of coin laundering involving the triad or Chinese stakeholders. Nonetheless, every bit coin laundering is not uncommon inward mainland mainland People's Republic of China (Song 2002; Zhang as well as Chin 2008), the cost fluctuation would furnish a valuable as well as timely chance for coin launderers to ready clean their illicit income through legitimate transactions inward the stock market.

What is described hither is appears to me to live a conventional (though real large) pump-and-dump scheme. 

*The system was (it is asserted) controlled past times Jimmy Heung (who the writer describes every bit the leader of the Dominicus Yee On Triad). For reference Jimmy Heung's Wikipedia page also asserts he is the leader of the Triad. 

*The front-man for the system is (it is asserted) a Mr Tang (of whom niggling details are given). 

*The system (it is asserted) involved Chinese State Owned Enterprises who entered into as well as so did not consummate non-binding agreements which were marketable on the Hong Kong Stock Exchange.   

*That the (asserted) malfeasant company inward the terminate changed its hollo to Prosper eVision to aid Earth forget the dirty-dealings. 

My obsession hither is with the mysterious Mr Tang. The article does non tell y'all who he is. However cursory exploration of the SEC database volition tell y'all that this Mr Tang is the same Mr Tang who after appeared every bit the Chief Financial Officer of mainland People's Republic of China Agritech.

This SEC filing announced his engagement every bit the CFO of mainland People's Republic of China Agritech as well as gives a brief CV:

On Oct 22, 2008, Mr. Yau-Sing Tang was appointed every bit the Chief Financial Officer of the Company. Mr. Tang, historic menstruum 46, was most lately primary fiscal officeholder of Carpenter Tan Holdings Ltd., a retail chain inward Mainland mainland People's Republic of China which is applying to live listed on the Hong Kong Stock Exchange. Prior to that, he was the founder as well as managing manager of GC Alliance Limited, a CPA theatre inward Hong Kong. From Apr 2003 to Dec 2005, he was executive manager as well as primary fiscal officeholder of mainland People's Republic of China Cable as well as Communication, Inc., which was listed on the OTC Bulletin Board. Mr. Tang received his Bachelor of Social Sciences (Honors) grade from the University of Hong Kong. He is a boyfriend of the Association of Chartered Certified Accountants inward the United Kingdom of Great Britain as well as Northern Ireland of Britain as well as Northern Republic of Ireland as well as the Hong Kong Institute of Certified Public Accountants. He is also a fellow member of the Institute of Chartered Accountants inward England as well as Wales as well as the Taxation Institute of Hong Kong.

This unloose reveals that he was previously the CFO of mainland People's Republic of China Cable as well as Communication. Following the trail y'all tin find this filing which gives his CV at that company.

Yau-Sing Tang joined the Board of Directors inward Feb 2003, as well as assumed the post of Chief Financial Officer as well as Chairman of the Board of Directors shortly thereafter. Mr. Tang served every bit Chairman of the Board until Oct 2003, when he assumed the seat of President of the Company. Since Jan 2002, Mr. Tang has served every bit Chief Executive Officer as well as Executive Director of CCCL.  

Since Nov 2000, Mr. Tang has served every bit Managing Director of GC Alliance Limited, a Certified Public Accountants theatre inward Hong Kong. Prior to that, Mr. Tang served every bit Deputy Chairman as well as Chief Executive Officer of Prosper eVision Limited (Stock Number 979), a society listed on The Stock Exchange of Hong Kong Limited as well as CCCL. Mr. Tang has over 17 years of sense inward accounting, finance, corporate finance as well as management, particularly administration of listed companies inward Hong Kong, Commonwealth of Australia as well as companies listed on NASDAQ. He is a fellow member of both the Hong Kong Society of Accountants as well as the Association of Chartered Certified Accountants as well as holds a Bachelor Degree inward Social Sciences (major inward Management Studies) from the University of Hong Kong. He is also the Chief Executive Officer as well as Executive Director of CCCL.

Note that this Mr Tang was the Chief Executive of Prosper eVision - the previously mentioned pump-and-dump.

Carlyle's mainland People's Republic of China Agritech work summarized

T. Wing Lo, a criminologist writing inward the (peer reviewed) British Journal of Criminology asserts that Mr Tang fronted a major stock fraud for the leadership of the Dominicus Yee On Triad.

He was after the Chief Financial Officer of mainland People's Republic of China Agritech - a society listed on the New York Stock Exchange.

This was a society Carlyle invested inward as well as lost money.

Mr David Rubenstein dismisses that every bit "insignificant".

Perhaps he would similar to destination this letter:

Dear Limited Partners

We have got lost some of your coin inward a society led financially past times someone who the British Journal of Criminology asserts fronts for the Dominicus Yee On Triad.  

I believe this loss is "insignificant" because ...

My view

Carlyle has major problems inward their investment procedure as well as competence inward China. This should live dealt with past times caput role (and caput role is beingness ill-advised if they believe the problems are "insignificant").




John