The Sichuan Trust company missed payments on the principal and interest that matured in June on TOT (trust of trust) investments worth at least $3.56 billion. Investors have gathered outside the company headquarters in Chengdu, Sichuan Province, to demand their money back.
While the company claimed it was affected by the economic downturn caused by the pandemic, some of the company’s investors suspect the firm has committed wrongdoing that led to its failure to secure the funds.
TOT is a type of investment product offered in China. According to Chinese media Caixin, trust companies sell shares in a trust, and in turn use the proceeds to invest in a wide variety of assets which are generally hidden from the shareholders. They may be bonds, stocks, or loans to private companies or local government financing vehicles.
A TOT creates another layer between investor and the ultimate investments. The proceeds from selling TOT products are invested in other trust products. That is, all the holdings of a TOT are other trusts, so the true investments are opaque.
Since mid-June, investors have been protesting at the company building.
An investor named Mr. Liu told The Epoch Times, payments were late in May. The June payment was not paid at all.
In May, the company denied rumors that its capital pool business had been frozen, and that it would be taken over by regulators.
Mr. Liu explained that according to the contract, a 10-day overdue payment is not a breach of contract. On June 12, when payments were not made for 10 days, some account managers understood the client did not receive the money and took the client to Chengdu, Sichuan to discuss the claim.
The chairman of Sichuan Trust admitted the problem with the TOT and agreed to look into ways to repay the investors.
Possible Ponzi Scheme
TOT products have become a way to “hide dirt” because they can be used to obtain investments in trust products that have problematic underlying assets, one former employee of Sichuan Trust told Caixin. In general, the contracts that investors sign do not specify the assets underlying the trust products that a TOT invests in.
Most of the underlying assets of Sichuan Trust’s TOT products had turned risky and the company needed to rely on funds from new investors to repay old investors, according to Zhou Bin, a deputy director of the provincial branch of the China Banking and Insurance Regulatory Commission (CBIRC), who talked with Caixin.
If accurate, this would be a description of a Ponzi scheme.
Zhou also mentioned to Caixin that investigators had found embezzlement of funds by shareholders and regulatory violations, such as the firm’s inability to disclose the risk status of underlying assets and the firm’s improperly connected transactions. He didn’t provide further details about the embezzlement.
In April, the provincial banking and insurance regulator restricted new sales of TOT, saying it suspected misuse of funds, according to a Financial Times report. That made it difficult for Sichuan Trust to maintain payouts and meet redemption requests.
Mr. Liu said, “The entire portfolio was a series of products worth more than 20 billion yuan (approximately US$2.8 billion). The restriction stops the capital flow and that’s how the repayment was halted.”
He explained, the TOT is managed like a reservoir with an inlet and an outlet. Once the inlet was blocked, the outlet was dry and that led to the breach of the contract.
Financial watchdogs have had their eye on Sichuan Trust since April 2018, according to Zhou Bin. It was believed that embezzlement was suspected in the investigation.
The TOT Fund Stopped by Beijing
Mr. Liu was present on the day representatives of investors gathered at Sichuan Trust to negotiate with the officials and Sichuan Trust. He said, “There were more police than investors. They surrounded the investors with the police cars. You wouldn’t be able to see anything from the other side of the road. The police cars and buses lined up on the street and blocked the entire view. The police forcibly drove away the protesters. Two elderly people were arrested. An old lady’s arm was wounded.”
On June 26, another round of negotiations went on with the three parties. It was scheduled for 10 a.m., but was delayed past 1 p.m. because the CBIRC officials were late.
Mr. Liu described the scene that day. “The investors were shouting outside the building, ‘give back the money’ from noon till 1 p.m., for more than an hour.” The meeting went on past 9 p.m.
That evening, the CBIRC claimed that the TOT fund was halted by Beijing.
Sichuan Trust said that the company will look into ways to repay investors, such as selling its office building or liquidating its subsidiaries’ shares. However, Mr. Liu said that og those two assets, one was frozen, and the other was mortgaged.
Mr. Liu indicated that the office building was worth as much as $280 million, but there’s no interested buyer.
As for the sale of shares, that requires the approval of the board of directors and major shareholders. Sichuan Trust stated that it is now only missing the second shareholder’s signature. The second shareholder is Zhonghai Trust, a state-owned enterprise, which holds 30 percent of the shares.
Why did Sichuan Trust take on the Ponzi scheme? Mr. Liu explained, it’s a way to pay the old debts with the new debts in order to hide the “dirt.”
He said, “At present, all of the large dirty assets have been litigated in lawsuits for many years, and no money can be obtained. Therefore, it is certainly impossible to recover, even if the lawsuit is won. Those assets are basically useless-zombie assets.”
Mr. Liu said that the minimum investment in TOTs was one million yuan (approximately $141,586). That amount could be an average Chinese person’s lifetime savings.
Mr. Liu invested around 2 million yuan. Along with his friends and relatives, the total was more than 10 million yuan (approximately $1,416,172). He said, “That means decades of work have gone nowhere.”
According to Sichuan Trust President Liu Jingfeng (no relation to Mr. Liu, the investor), the outstanding value of the company’s TOT products stood at $3.56 billion.