Whistleblower Exposes Major Scandal at E Fund Hong Kong: Allegations of Fraud, Bribery, and Market Manipulation

Whistleblower Alleges Serious Violations at E Fund’s Hong Kong Unit: A Deep Dive into the Scandal

On September 24, 2024, a whistleblower letter circulated in the financial community, bringing to light a series of serious allegations against E Fund Asset Management (Hong Kong) Ltd., a subsidiary of E Fund Management, one of China’s largest public fund management companies. The whistleblower accused the Hong Kong branch of violating multiple ethical and legal standards, raising concerns over the integrity of the fund management industry.

What Happened?

The whistleblower’s letter, addressed to key regulatory bodies including China's Central Commission for Discipline Inspection, the China Securities Regulatory Commission (CSRC), the Hong Kong Securities and Futures Commission (SFC), and others, claims that E Fund Hong Kong engaged in significant misconduct across five main areas:

1. Covering up losses: E Fund Hong Kong is accused of helping Shanghai Bank conceal substantial investment losses in overseas dollar bonds, with the bank's losses amounting to billions of yuan.
2. Lavish bribery: The fund is accused of offering luxury gifts and lavish banquets to clients, breaching anti-corruption regulations.
3. Misleading fund valuations: The company allegedly manipulated the valuations of public funds in Hong Kong, which caused harm to investors.
4. Unauthorized fund transfers: Accusations of misappropriation of company funds and unethical profit transfers have been made.
5. Illegal short selling: E Fund Hong Kong allegedly engaged in illegal short-selling of Hong Kong-listed stocks.

The whistleblower claims that the evidence was gathered by multiple current and former senior employees over a year, stressing the legitimacy of the allegations.

Key Takeaways:

1. Shanghai Bank’s Hidden Losses: The bank's investments in two key E Fund Hong Kong funds, which suffered significant losses due to the underperformance of overseas bonds, were reportedly covered up with falsified financial reports.
2. Bribery and Gifts: Luxury gifts such as Hermès products were allegedly given to clients, violating anti-bribery regulations.
3. Manipulated Valuations: The whistleblower alleges that E Fund Hong Kong used dubious accounting practices to artificially inflate the value of funds, misleading both investors and regulators.
4. Illegal Short Selling: E Fund Hong Kong is accused of selling more shares than it owned, a breach of securities regulations in Hong Kong.

Deep Analysis: Impact on China's Financial Integrity

The gravity of these allegations poses a significant threat to the integrity of the financial markets in both Hong Kong and China. The claim that Shanghai Bank, a state-owned entity, and E Fund Hong Kong colluded to hide losses suggests systemic vulnerabilities in oversight and corporate governance. If true, this could lead to significant regulatory repercussions, not only for the entities involved but also for the broader financial sector.

The alleged manipulation of fund valuations and illegal short selling points to weaknesses in risk management and compliance systems within the company. Such practices can erode investor trust, which is critical for the financial markets' functioning. The CSRC and SFC are likely to face increasing pressure to tighten their scrutiny of cross-border financial activities, especially involving state-owned banks and major fund management firms.

Moreover, the bribery allegations signal deep-rooted corruption that undermines both corporate governance and investor protections. E Fund’s reported misuse of client funds and bribery schemes raise questions about internal controls and ethical leadership within the company.

Did You Know?

• E Fund Management is one of China’s largest public fund managers, with assets under management (AUM) exceeding 1.3 trillion yuan as of 2023. This makes the scandal even more impactful, as it involves a highly prominent player in China's financial markets.
• The whistleblower claims the falsified reports led to Shanghai Bank inflating its profits by more than 10 billion yuan over three years, from 2021 to 2023, without external auditors noticing.
• E Fund Hong Kong also allegedly falsified reports for another major state-owned entity, Shanghai Automotive Group (SAIC), hiding significant losses in offshore investments, further complicating the scandal.

The unfolding situation brings to light the importance of strict regulatory enforcement and ethical governance in maintaining investor trust and market integrity. With regulators now involved, the financial community eagerly awaits the results of the investigations into one of China’s largest financial entities embroiled in controversy.

The Full Whistleblowing Letter

Whistleblower Letter

To: Central Commission for Discipline Inspection, State-owned Assets Supervision and Administration Commission (SASAC), National Audit Office, State Administration of Taxation, China Banking and Insurance Regulatory Commission (CBIRC), China Securities Regulatory Commission (CSRC), Hong Kong Securities and Futures Commission (SFC), Shanghai Stock Exchange, Liaison Office of the Central People’s Government in Hong Kong, shareholders of Shanghai Bank, shareholders of SAIC Motor, and shareholders of E Fund Management.

This letter is a formal whistleblower report regarding E Fund Asset Management (Hong Kong) Ltd. ("E Fund Hong Kong"), a subsidiary of China’s largest public fund management company, E Fund Management. E Fund Hong Kong has been involved in multiple violations of the industry’s professional standards and ethical principles through its overseas operations.

Key Allegations:

1. E Fund Hong Kong assisted Shanghai Bank in concealing significant overseas investment losses.
2. E Fund Hong Kong provided lavish banquets and luxury gifts to clients, violating anti-corruption regulations.
3. E Fund Hong Kong ignored Hong Kong laws, manipulating the valuations of Hong Kong public funds, severely harming fund investors.
4. E Fund Hong Kong engaged in unauthorized use of its own funds, facilitating improper financial transfers, displaying a lack of professional ethics.
5. E Fund Hong Kong illegally short-sold Hong Kong-listed stocks, undermining market integrity.

Detailed documentation and evidence of these major violations can be found in the attached materials. All institutions, especially E Fund Management and Shanghai Bank, are advised to refrain from making any formal statements claiming these reports are false or fabricated before conducting a thorough internal investigation.

The content of this letter, along with the evidence provided, has been collected over the course of a year by multiple current and former senior executives and department heads at E Fund Hong Kong. Every statement in this letter is factual and not a rumor.

Major Violation #1: Concealing Losses

Shanghai Bank (Shanghai Stock Exchange code: 601229) entrusted E Fund Hong Kong with the management of more than RMB 10 billion of its overseas funds through two specific accounts (referred to as Account 2 and Account 8, managed by ICBC Asia).

These funds were primarily invested in two Hong Kong public funds managed by E Fund Hong Kong: the E Fund (Hong Kong) Select Bond Fund (approx. RMB 7 billion) and the E Fund (Hong Kong) Asia High Yield Bond Fund (approx. RMB 3 billion). Shanghai Bank is the largest investor in both of these funds, indirectly holding about 70% of the total shares.

Due to the widespread collapse of U.S. dollar bonds in 2021 and 2022, these two funds suffered major losses, with the E Fund (Hong Kong) Asia High Yield Bond Fund declining 20% in 2022. To conceal these significant losses, Shanghai Bank and E Fund Hong Kong colluded to manipulate monthly account reports. They employed fraudulent accounting techniques under the guise of amortized cost accounting to adjust the net value of fund shares, hiding the substantial losses incurred by Shanghai Bank between 2021 and 2023. This resulted in Shanghai Bank overstating its annual net profits by over RMB 1 billion during these years.

E Fund Hong Kong provided misleading audit confirmation letters to external auditors (PwC Zhongtian LLP), leading them to believe the manipulated data. Even after PwC identified issues in May 2024, E Fund Hong Kong continued to mislead them, resulting in Shanghai Bank’s 2024 half-year report still reflecting inflated profits.

To further mislead Shanghai Bank’s management, E Fund Hong Kong revised the dividend policy of the E Fund (Hong Kong) Asia High Yield Bond Fund in August 2022, converting non-dividend-paying shares into dividend-paying shares (I2 Class). This change, which appeared innocuous to most, was a deliberate attempt to obscure Shanghai Bank’s massive losses. Although the fund was performing poorly, the I2 Class shares could pay dividends out of capital rather than actual returns, creating the illusion of positive returns for Shanghai Bank. These fabricated dividends were reported internally as profits, concealing the real financial state.

E Fund Hong Kong continued to periodically distribute dividends to Shanghai Bank, further misleading management into believing the investment was stable and profitable.

Major Violation #2: Bribery and Corruption

The unethical behavior of E Fund Hong Kong’s employees is driven by personal gain. Attached to this letter are five voice recordings stored on Microsoft Cloud (link provided). These recordings, obtained legally, involve high-level E Fund Hong Kong executives directing unethical actions.

The recordings include:

• Instructions from the E Fund Hong Kong President for the former Director of Product and Strategy to send luxury gifts to Shanghai Bank’s team.
• Directions for reimbursing a Hermes gift sent to Shanghai Bank.
• Reimbursement instructions for a lavish banquet with senior executives of ICBC Private Bank, tied to cross-border investments.

Furthermore, records show that gifts were provided to other high-ranking individuals, including E Fund Hong Kong’s Chief Investment Officer and Board Members, with the involvement of state-owned enterprises like SAIC (Shanghai Automotive Group). These bribes were reimbursed internally without regard for legal consequences.

SAIC also engaged in cross-border corruption, violating regulations by using offshore commissions to funnel personal profits. For years, E Fund Hong Kong facilitated this by paying advisory fees to a Cayman Islands-registered entity, BIN YUAN CAPITAL (CAYMAN) LIMITED, which provided no real services. This amounted to fraud against the state.

Major Violation #3: Fund Manipulation

E Fund Hong Kong sacrificed the interests of other investors to protect its parent company, E Fund International Holdings. When the fund suffered foreign exchange losses due to management errors, the company illegally shifted profits between share classes to benefit its own funds at the expense of other investors.

Major Violation #4: Illegal Use of Proprietary Funds

E Fund Hong Kong’s proprietary funds were meant to be managed independently. However, internal manipulation by senior executives, including control by E Fund's domestic public fund managers, allowed them to exit losing positions before other investors, in direct violation of China’s securities laws.

Major Violation #5: Illegal Short-Selling

On February 14, 2023, E Fund Hong Kong’s public stock fund manager sold more shares than the fund held, committing illegal short-selling through the Bloomberg trading system. Despite system warnings, this transaction was manually approved. No report was made to the Hong Kong Securities Commission.

E Fund Hong Kong’s compliance and risk management failures are evident, and its reckless actions require immediate investigation by the authorities.

Conclusion

Given the significant impact on the financial market, I urge SASAC, the National Audit Office, CBIRC, CSRC, SFC, and other regulatory bodies to conduct a full investigation to prevent this non-systemic risk from escalating into a financial crisis. I remain anonymous out of concern for my safety, but I am willing to cooperate fully with regulatory agencies.

Sincerely,
Whistleblower of E Fund Hong Kong
September 24, 2024