Chinese Investment Firm Under Investigation for Fraud, 12 Executives Arrested

March 3, 2021 Updated: March 3, 2021

Financial firm Dalian Huaxun Investment Co., Ltd. has been ordered by Chinese authorities on Feb. 28 to suspend its business operations due to allegations of fraud and false advertising.

So far, 147 employees, including the chairman and 11 executives, have been placed under criminal investigation on charges of fraud and running a false advertising scam involving 2.7 billion yuan (about $417.2 million), Chinese news portal Sohu reported.

The investment firm was also given administrative penalties by regional securities authorities, according to Chinese media.

Dalian Huaxun was established in 2000 in Dalian city, in China’s northeastern Liaoning Province. It is one of China’s first companies that obtained a certificate of investment advisor. In 2015, it was listed on the country’s National Equities Exchange and Quotations (NEEQ), a platform for trading the shares of a public limited company that is not listed on either the Shenzhen or Shanghai stock exchanges.

The company attracts shareholders through a stock recommendation app called “Huaxun Stock App” and charges a membership fee with a promise of high returns, according to Chinese media reports.

It advertises on multiple online platforms and offers incentives such as free “golden stocks” to attract potential investors. Once they click the link, they enter a chat group where a salesperson persuades them to invest in the app.

Dalian Huaxun targets a certain group of people and avoids selling their services to public servants, lawyers, and media personnel.

In March 2020, a female client surnamed Huang was lured in. She was enticed by the company’s promise of lucrative gains and she followed the advice of a financial advisor who persuaded her to invest in “Huaxun Stock App.” However, she sustained losses once she bought stocks that were recommended by the app, according to Chinese media reports.

When Huang began to complain, the company ignored her. But after she reported the situation to local police and threatened to file a complaint with the China Securities Regulatory Commission, Dalian Huaxun immediately responded. Huang was given a refund, but she was made to delete all her online chat history with the company’s staff and to drop the case.

According to Chinese media reports, Dalian Huaxun’s annual membership fees vary from 8,800 yuan (about $1,360), 28,000 yuan (about $4,327), 39,800 yuan (about $6,151), and 128,000 yuan (about $19,782). Its employees gain a commission between 3 percent to 10 percent, depending on the sales.

The company claims that it has “85 professional researchers, 26 first-rate analysts, and that more than 80 percent of its employees are senior professional title holders.”

Most of the company’s employees are unqualified and are not licensed financial advisors, and some only have a middle school education, Sohu reported.

Since 2017, Dalian Huaxun has been penalized several times by authorities for hiring unlicensed sales staff, Chinese media Yicai Global reported.