Wealthroll Owner Confesses Fraud Amid Online Lending Crackdown

(Bloomberg) -- Chinese authorities pursuing a nationwide campaign against unregulated investment firms and online lenders have revealed details of a Ponzi scheme that allegedly defrauded more than 25,000 investors of 39.9 billion yuan ($6.1 billion).

Wealthroll Asset Management Co., a Shanghai-based seller of wealth-management products, still had unpaid debt of 5.2 billion yuan owed to 12,800 individual investors, the Communist Party-controlled Jiefang Daily reported Monday, citing police and a confession from the firm’s owner Xu Qin. Xu and 34 other executives from Wealthroll, which was shut down by police in April, were arrested on May 13 for allegedly raising public deposits illicitly, according to the report.

Chinese authorities are acting to head off potential instability after almost 1,000 online lenders collapsed in the past year and amid signs of fraud at wealth-management firms. In December, the nation’s biggest-ever Ponzi scheme was exposed after Internet lender Ezubo allegedly defrauded more than 900,000 people out of the equivalent of $7.6 billion. Wealthroll’s Xu squandered investors’ money on homes, luxury cars -- including a 47-million-yuan Bugatti -- and raised peacocks at his home in Shanghai’s Lujiazui financial district, the Jiefang Daily said.

“From the way we operate, we are a Ponzi scheme,” Xu said in a televised confession published on the newspaper’s website. The ex-soldier, who was born in 1981, started Wealthroll in 2011 with 5 million yuan from family and friends, and offered a 2 percent monthly return to attract his first investors, the paper said.

Big Payoffs

China’s cabinet last month started its first campaign to clean up illicit activities in Internet finance, focusing on areas such as third-party payments, peer-to-peer lending, crowdfunding and online insurance. It suspended the registration of all new companies with finance-related names.

As the number of peer-to-peer, or P2P, firms grew, the online lenders began opening stores on busy streets or in luxury office buildings and hired thousands of staff to sell products promising extraordinary returns to lure funds from investors. Other brick-and-mortar firms sprang up offering wealth-management products with big payoffs, and many of those moved online too, giving visibility to what was previously the hidden world of shadow banking.

Among the more than 220 partner firms Xu established to raise funds from investors, only one was registered with the securities regulator and all the proceeds went into Wealthroll’s own asset pool rather than into the custodianship of a bank, the report said. The firm paid its sales managers commissions ranging from 4 percent to 400 percent, based on the type of products.

Wealthroll rented multiple high-end office spaces in Shanghai to bolster its corporate image, according to the Jiefang Daily. Bloomberg has been unable to contact Xu or other Wealthroll officials since the company was shuttered more than a month ago.

Separately, police busted a pyramid scheme with more than 5,800 victims from 28 provinces who lost millions of yuan, Xinhua News Agency reported on Saturday, citing the Ministry of Public Security. Employees of Beijing-based World Capital Market Inc. posed as investment bankers and venture capitalists to con investors into buying memberships to its services and “digital assets,” with promises of returns between 60 percent and 80 percent within 100 days, the government news agency said.

No contact details were available on World Capital’s website.

--With assistance from Jing Jin To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey, Russell Ward

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