Insight – Frankfurt exchange’s China dream turns to nightmare

FRANKFURT/SHANGHAI (Reuters) – When Deutsche Boerse set off eight years ago to lure Chinese companies to Germany with fast listings and low fees, it dreamed of one day landing a giant like Alibaba.

Traders are pictured at their desks in front of the DAX board at the Frankfurt stock exchange September 19, 2014. REUTERS/Remote/Stringer

But as the New York Stock Exchange basks in the $22 billion debut of the Chinese e-commerce company, the German exchange operator is licking its wounds after a raft of scandals involving Chinese firms listed in Frankfurt.

Investors are wondering how to seek redress and what can be done to prevent it happening again.

In the latest and most bizarre case, Ultrasonic, a small Chinese shoemaker listed on the Frankfurt Stock Exchange, announced last week that Wu Qingyong, the company’s chief executive, and his son had disappeared, along with $60 million from the company’s bank account.

Late on Sunday Wu resurfaced, saying in a video interview shown by Chinese news outlet Sina that he had simply been on holiday with his grandson and had lost his mobile phone. On Monday, Ultrasonic said Wu had contacted the group’s finance chief to say he would return to the company, along with the money.

Ultrasonic’s shares more than doubled to around 2.30 euros in Frankfurt on Monday, but were still more than 60 percent down from where they began last week.

It was the third time that shares in a Chinese firm listed in Germany have collapsed amid accusations of wrongdoing.

The Frankfurt Stock Exchange says it has rigorous listing standards to protect investors from fraud, but the scandals suggest that in the drive to win Chinese listings in the face of tough competition from New York and London, officials in Frankfurt may not have fully appreciated the risks.


With little hope of any compensation from China, a member of German private investor lobby SdK has suggested investors should consider taking auditors and underwriting banks to court.

The company’s auditors declined to comment and Frankfurt-based brokerage BankM, lead manager in all three listings, or IPOs, said there was no way it could have known.

“This is a total catastrophe,” said Thomas Stewens, head of corporate strategy and communications for BankM, which staked its reputation in part on the Chinese listings. “It’s unimaginable how this could come to pass.”

There were few signs that anything at Ultrasonic was amiss, Stewens told Reuters. “We were in China regularly, certainly 20 times over the past few years, and we regularly checked production on site,” he said.

Qingyong Wu, the chief executive, seemed to live entirely for his company. His son, chief operating officer Minghong Wu, was also part of the family operation.

“Then the son bought himself a Maserati. We had to ask: “Is that really necessary?” But we had no way of knowing that there was an outbreak of megalomania,” Stewens said.

Japanese bank Nomura’s decision to give the company a $60 million unsecured credit facility also indicates that nothing seemed to be amiss. People involved in the loan talks said the bank did exhaustive background checks.


The scandals have brought pressure for change in a corporate governance system designed to claw back funds from wrongdoers based in Germany rather than overseas.

Prosecutors in Cologne, Germany, where Ultrasonic has its legal headquarters, said they had not yet been contacted by the company about launching a criminal investigation.

The bourse says it has 25 Chinese companies listed on the exchange. For many, the executives are legally liable in Germany but the majority of their funds and their underlying business are abroad and subject to a different legal system.

Ultrasonic’s supervisory board chairman told Reuters it was trying to gain access to the company’s accounts in Hong Kong and China, where Wu Qingyong is still the legal representative with power of attorney over local funds, even though he had been dismissed as CEO of the Frankfurt holding company.

Ultrasonic said its system of corporate governance was not to blame for the disappearance of the funds.

“In the case of fraud or breach of fiduciary trust, its not about whether the framework was faulty, it is about how it was possible for Mr Wu to make obviously fraudulent bank transfers to private accounts,” supervisory board chairman Johannes Mauser said in an e-mailed statement on Sunday, a day before the company said Wu had pledged to repatriate the funds.

Ultrasonic was trying to replace Wu Qingyong as the legal representative in China and Hong Kong, Mauser said in the statement on Sunday. Wu could not be reached for comment.


Last year, Deutsche Boerse suspended its aggressive marketing strategy in China, disappointed in its hopes of winning top listings like Alibaba and, according to some officials, worried about reputational damage.

Its suspension followed a change in the management at the bourse, said a source familiar with the exchange’s thinking who declined to be named.

The source said the new management did a cost benefit analysis to gauge the likelihood of landing huge IPOs vs the likelihood of additional scandals. They concluded it was best to drop doing roadshows in Shanghai to solicit China companies.

An October 2013 update of study commissioned by the bourse on the China market to use in marketing materials to prospective listing companies and investors hinted at the problem.

It observed: “Greater China reported a significantly lower number of IPOs during 2013, after the Chinese regulator suspended the listing of new shares in the mainland in October 2012, following reports of fraudulent accounting practices by previously listed companies.”

The “China Market Study,” by research firm The Smart Cube, said Deutsche Boerse’s listing process took less than 12 months, compared with up to five years on Chinese stock exchanges and from three to 24 months at other big exchanges in Europe and the United States.

The listing fee for Deutsche Boerse’s prime standard was 5,500 euros ($7,055), compared with listing fees for other exchanges, which ranged from 65,000 euros to 489,100 euros, it said.

Although the study was published on the exchange’s website, some investors in the Chinese companies lured by Deutsche Boerse appear to have been unaware how big the potential risks were.

One top 10 Ultrasonic shareholder described the event as a bolt of lightning from a clear blue sky.

“Who could imagine that somebody would run off with the company’s entire treasury?” said the investor, who declined to be named as his company prepares a coordinated response with other European investors.

Juergen Kurz, a spokesman for DSW, Germany’s oldest and largest association for private investors, described Chinese companies as “tricky”.

“The ‘China’ label helps them tap money but investors should be extremely cautious because it is so difficult to influence things after they have gone wrong.”


A senior stock exchange lawyer said that was a loophole that needs to be tightened. Some of the Chinese executives feel they will not be pursued at home if they commit a crime in Germany, the lawyer told Reuters on condition of anonymity.

“What needs to happen now is that the system of redress for shareholders needs to become as international as the companies listed on the Frankfurt Exchange,” he said.

“But that can only happen if the Chinese authorities take incidents like this seriously.”

China’s Securities Regulatory Commission in Beijing could not be reached for comment. The publicity and propaganda office at the Jinjiang public security bureau, declined to comment. The Jinjiang government referred calls on the issue to the publicity and propaganda office of the Jinjiang municipal Communist Party committee, but calls to that office went unanswered.

BankM also wants tougher regulatory action in both China and Germany by connecting authorities in both countries, hoping this will increase pressure on Chinese companies, Stewens said. “Fundamentally, it would be welcome if there were international regulatory cooperation,” he said.

BankM underwrote the listing of Youbisheng Green Paper, which initiated insolvency proceedings earlier this year after its CEO went absent without explanation.

Chinese fashion group Kinghero, also underwritten by BankM, accused its former chief executive of breach of fiduciary trust back in January and later delisted.

Ultrasonic’s German auditors, BDO, declined to comment, saying they had only recently been appointed and were not allowed to discuss an ongoing client relationship. Warth & Klein Grant Thornton, the company’s previous auditors, said they never comment on individual client relationships.

“We are in a difficult situation” said Ultrasonic finance chief Chi Kwong Clifford Chan, who on Sept. 16 sounded the alarm in an urgent notice to investors.

Efforts to contact other company officials in Germany were unsuccessful. “I’m not authorised to speak to you, we only collect the mail,” said a female employee at Duesseldorf-based auditing and advisory firm BPG mbH, listed as the relevant address for Ultrasonic in Germany on its regulatory statement.

Businessman Peter Klee, 57, told Reuters he bought 1,000 Ultrasonic shares in 2011 for around 9,000 euros. He is urging Germany’s small shareholder association SdK to press for a ban on any Chinese company from listing in Frankfurt until shareholders of Ultrasonic and other scandals are compensated.

“I’ll never buy Chinese shares again,” he said.

(1 US dollar = 0.7796 euro)

Additional reporting by Alexander Huebner in Frankfurt and Matthias Inverardi in Dusseldorf; additional writing by Thomas Atkins; editing by Georgina Prodhan and Philippa Fletcher

Our Standards: The Thomson Reuters Trust Principles.

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