Exclusive: DeepSeek-Linked Quant Fund Caught Up in Kickback Scandal

Summary:

[para. 1] High-Flyer Quant, a prominent Chinese quantitative hedge fund affiliated with the AI firm DeepSeek, is under official investigation regarding whether a senior executive, Li Cheng (head of market operations), received illicit kickbacks sourced from brokerage commissions paid by China Merchants Securities (CMS) [para. 1]. Li reportedly cooperated with the authorities in November and was subsequently placed under formal judicial investigation [para. 2]. Authorities are specifically investigating if Li accepted over 20 million yuan (approximately $2.8 million) in kickbacks, which were paid covertly by CMS staff using funds derived from commissions on executed trades for High-Flyer Quant [para. 3].

[para. 4] In China, only licensed securities firms like CMS can execute trades directly on exchanges, and private funds such as High-Flyer Quant must obtain market access via these firms, paying them commissions [para. 4]. Regulatory bans are in place prohibiting brokerage commission kickbacks to individuals, but this case highlights a compliance gap and potential conflicts of interest, revealing how personal incentives might guide brokerage selection rather than institutional interests [para. 5].

[para. 6][para. 7] The kickbacks are part of a broader bonus-sharing network that operated over five years (2018–2023), involving CMS staff at several hierarchical levels [para. 6][para. 7]. Li Cheng allegedly received the money from CMS employees over this period, with the central figure in the scheme being Meng Pengfei, then general manager of a Shenzhen branch of CMS [para. 8]. Meng appointed a relative as High-Flyer Quant’s dedicated broker, benefiting from CMS’s internal policy that allowed brokers up to 40% of net commissions as bonuses for their performance [para. 9]. High-Flyer Quant, which conducted significant high-frequency trades, generated substantial commissions that led to these bonuses [para. 9].

[para. 10][para. 11] At its height, Meng’s relative received 2–3 million yuan in monthly performance bonuses linked to High-Flyer Quant’s trading, totaling 118 million yuan over five years [para. 10]. Of this, more than 20 million yuan was passed to Li to guarantee that High-Flyer Quant continued routing trades through CMS [para. 11]. Li, previously employed by CMS, exploited his insight into the firm’s bonus system and solicited a share from Meng [para. 11]. The rest was divided between Meng (who kept over 80 million yuan) and Liu Huan (head of CMS’s private client department at the time), who received 10 million yuan for facilitating the arrangement [para. 12].

[para. 13][para. 14] After suspicions emerged in November about a potential commission rebate scandal involving a High-Flyer Quant employee, the firm stated that the matter was personal and not reflective of its overall practices [para. 13]. Li was described as occupying a crucial, autonomous role within the company, second only to the founder, Liang Wenfeng [para. 14].

[para. 15] The investigation comes as High-Flyer Quant and its AI subsidiary DeepSeek gained attention when the latter released an advanced large-language model competing with global leaders, but at much lower training costs [para. 15].

[para. 16][para. 17][para. 18] The scandal expanded in May after authorities disclosed an investigation into Gao Xiang (general manager of CMS’s institutional business division) for corruption. Gao—previously an anti-corruption official—was taken by authorities in March. After Li was asked to cooperate with investigators, Meng attempted to bribe Gao with gold worth 3 million yuan, which Gao later returned [para. 16][para. 17][para. 18]. The case underscores entrenched compliance and corruption risks in China’s securities sector, emphasizing that personal incentives still influence institutional dealings despite regulatory prohibitions [para. 19][para. 20][para. 21].