Mar 07, 2014 02:49 PM

Jilted U.S. Investors and Debtors on the Run

(Shanghai) -- U.S. investor Bill Wells went hunting for profits in China but was eventually hung out to dry.

Now, he wants to know what happened.

Wells and his Tennessee-based firm Pope Asset Management LLC (PAM) are trying to recover US$ 15 million invested six years ago in a now-defunct pharmaceutical company, Laiyang Jiangbo Pharmaceuticals Co. Ltd. Yet the prospects look grim, based on Wells' ongoing probe and a Caixin investigation.

The money trail from PAM's 2008 purchase of Jiangbo-issued convertible bonds leads to the company's delisting on America's Nasdaq Stock Exchange. And it appears to lead to a Jiangbo executive with high-level government connections in the eastern province of Shandong.

PAM is not the only firm waiting and hoping for repayment in the wake of Jiangbo's 2011 failure. Dozens of suppliers and leasing firms who did business with a biotechnology company run by Jiangbo's chairman, Cao Wubo, are also standing in line.

Wells suspects Cao used money from the bonds issued to U.S. investors including PAM and stock issued on the Nasdaq exchange to start the company that's now in arrears to its suppliers, Shandong Hilead Biotechnology Co. Ltd.

Hilead was founded in April 2008, one year after Jiangbo listed, with registered capital of 10 million yuan. It has been increased to 360 million yuan, and business records show 323 million yuan of that capital came from Cao.

Wells' hunch is based on a 2011 violation notice issued by the State Administration of Foreign Exchange (SAFE), a government agency that oversees the country's inbound and outbound currency flows. Jiangbo was cited for breaking SAFE's rules by transferring US$ 27.7 million raised overseas to Hilead and a brother company of Jiangbo without regulatory permission.

Jiangbo officials initially told regulators they planned to buy real estate with the money raised in the United States.

Cao could not be reached for comment, even though he's also a public figure who serves on the Yantai people's congress, a legislative body for the Shandong city. Calls to his number led to a recording that said his phone service was suspended.

Tricks of the Trade

Hilead is in deep financial trouble. Caixin learned from sources who asked to remain anonymous that suppliers and other creditors are waiting to be paid. They might have grounds to seek help from police.

The company's start-up funds, as well as generous loans issued by local governments and big banks, have apparently dried up.

So far, Caixin learned, not a single creditor has asked authorities to intervene. They apparently fear that Hilead executives, and perhaps Cao, will react to an official investigation by making sure no one gets repaid.

Wells was no stranger to this and other particularities of the business-credit landscape in China. PAM, which has nearly US$ 500 million under management, made money in Chinese company stock investments before buying Jiangbo bonds.

The bond purchase, Wells said, followed a recommendation from an investment banker he trusted who said Jiangbo was a sound bet. Looking back, Wells said he should have pursued due diligence before jumping into the deal.

Jiangbo issued US$ 35 million worth of stock-convertible bonds in 2007 and 2008 to PAM and other U.S. institutional investors.

PAM's initial purchase totaled US$ 22 million. It had sold US$ 7 million worth of bonds before Jiangbo's delisting.

Jiangbo joined Nasdaq in October 2007 through a reverse merger, a listing procedure once commonly used by Chinese companies that wanted to sidestep Chinese government's restrictions on foreign investment. Through the arrangement, the Chinese company's profits and obligations would be entirely held by an overseas entity, in this case, a Florida-based shell company, in which foreign individuals and businesses make investment.

Executives at Jiangbo arranged the bond sales after the Nasdaq listing failed to raise enough cash to suit the company's needs, the investment banker told Wells.

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