Businessman Gets Life Sentence for Defrauding Xinjiang Breeder

A businessman behind a 2.4 billion yuan ($372 million) deal to help a money-losing Xinjiang-based livestock breeder avoid delisting four years ago was sentenced to life in prison for contract fraud.

The case involved a 2017 restructuring deal between Xinjiang Tianshan Animal Husbandry Bio-Engineering Co. Ltd. and Guangdong Elephant Advertising Co. Ltd. Shenzhen-traded Tianshan Animal Husbandry, which develops cattle breeding and genetic improvements, had reported losses for two straight years and faced being kicked off the exchange. To prevent that, the company agreed to acquire ChiNext-traded Elephant Advertising for stock and cash.

That deal fell apart just a year later when Tianshan Animal Husbandry alleged that Chen Dehong, controlling shareholder of Elephant Advertising, was suspected of contract fraud, embezzlement, illegal guarantee and other illegal actions.

After Tianshan Animal reported the case to police, Chen and his nephew, Elephant board secretary Chen Wanke, were arrested in February 2019. A court in Xinjiang ruled recently that Elephant Advertising and Chen Dehong engaged in contract fraud by falsifying facts, concealing truth, and defrauding a huge amount of assets from Tianshan Animal Husbandry for the purpose of illegal possession, Tianshan Animal Husbandry said Monday in a statement.

Under the 2017 deal, Tianshan Animal Husbandry agreed to pay Chen in 577 million yuan in cash and 1.8 billion yuan in shares. The cash payment was never made, but the stock portion completed equity ownership registration, the court said.

Elephant Advertising was fined 10 million yuan for contract fraud. Chen Wanke was sentenced to 15 years in prison and fined 3 million yuan, according to the court ruling. Chen Dehong appealed his life sentence to the Xinjiang Higher People’s Court, according to people close to him.

The transaction was controversial because money-losing Tianshan Animal Husbandry was trying acquiring a much bigger company in an unrelated business to avoid delisting. In April, the China Securities Regulatory Commission Tianshan fined Animal Husbandry 300,000 yuan for information disclosure violations related to the restructuring. The regulator said the company didn’t disclose Elephant Advertising’s financial fraud in its filings.

Before the deal, Tianshan Animal Husbandry owed about 1.14 billion yuan to companies affiliated with Zhongzhi Enterprise Group, an investment holding conglomerate. Under a separate, secret agreement, Chen Dehong paid Li Gang, who owned 35% of Tianshan Animal Husbandry, 1.5 billion yuan, according to people familiar with the deal. Of that amount, 1.2 billion yuan was to help Tianshan Animal Husbandry to repay the Zhongzhi debts; in exchange, Chen Dehong got 22.4% of Tianshan Animal Husbandry’s stock. The remaining 300 million yuan was to refund part of the company’s 577 million yuan cash payment in the Elephant Advertising acquisition.

During the merger talks, Chen Dehong concealed facts including inflated revenues at Elephant Advertising, prosecutors found. He also provided false financial data and forged important contracts to intermediaries, including Caitong Securities, Grandall Law Firm and Dahua Certified Public Accountants Co. Ltd.

Now Tianshan Animal Husbandry faces delisting again. According to rules revised by the Shenzhen Stock Exchange in December 2020, if Tianshan’s main business continues to lose money and its revenue is less than 100 million yuan in 2021, it will be subject to a delisting risk warning. The company reported a net loss of 43 million yuan in the first half of this year.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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