The Fall of D'Long

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Excerpts

To finance the rapidly growing businesses, D'Long started several companies. These were owned by the Tang brothers in complicated equity holding patterns. In order to overcome the limitations in obtaining finance, D'Long adopted different finance mechanisms, which included complicated interlocking shareholdings, diffused ownership, securing of loans with stock market holdings, bank ownerships, and its own brokerage companies. Another method the company used was obtaining bank loans by providing collateral securities (Refer to Exhibit III for the methods used by companies in China to raise finances)...

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In 2001, Larry Lang, a professor at Chinese University of Hong Kong, wrote in an article that D'Long lacked a proper corporate governance structure and transparency and accused the company of manipulating stocks. He quoted the transactions between the listed and unlisted companies of D'Long and warned that in all probability, the company would soon be heading toward bankruptcy. Company officials promptly denied the allegations. In the financial year 2000-01, several scandals were reported in the stock markets in China. One such scandal involved Zhongke Chuangye, a venture capital firm, which raised US$ 650 million from the investors, and manipulated the share prices............

In April 2004, D'Long issued a statement that it had been using the shares of Shenyang Hejin, Tunhe, and Torch Automobiles as collateral for taking loans from the banks. This led to growing concerns among investors about the company's financial position. On its website, D'Long claimed that with the macroeconomic changes brought in by the government, borrowing from the banks had become difficult. ..........

After the debacle, media reports alleged that the Tang brothers had been able to build up their empire due to their close connections with government officials. According to Robert Kwauk, a partner at Blake Cassels & Graydon's Beijing, "The Tangs were well-connected with the old school government and the banking industry, so they had access to political clout and financing."In December 2005, Wang Xiaoshi, an official with China Security Regulatory Commission, was sentenced to 13 years in prison for taking bribes from D'Long... .........

Exhibit I: A Note on Bank and Capital Market Financing in China
Exhibit II: Top Ten China Money Capitalist 50
Exhibit III: Methods of Obtaining Finance in China