Tuesday, March 20, 2007

Chinese Ant Fraud: The Perils of Globalization

by William Prendergast

Well, there goes another barrel full of my money, down the toilet. I know we have readers in China, that’s what the reader demographics show. I’m begging them to take a look at the following article and then explain to me exactly what happened. Look at this:

Ant Fraud Yields Death Sentence

By Ariana Eunjung Cha
Washington Post Foreign Service
Tuesday, March 20, 2007

YINGKOU, China -- To hear Chinese authorities tell it, Wang Zhendong is a danger to society, the worst kind of person, one who took advantage of his fellow citizens' naivete and trust. Last month, a court here gave him the death penalty for his crimes.

Wang's misdeed: selling overpriced ant farms to the public.


A death sentence


A Ponzi-type scam involving ant farms, promising a 40 percent yearly return. Investors got some payments before the scheme unraveled.


More than 36,000 people invested, with some spending all their savings.

As China moves fitfully from a planned economy to a free-market system, cracking down on fraud, embezzlement and other financial schemes has become a major priority for the government. Among the cases taken most seriously are ones that harmed common people.

In Wang's case, for instance, investors shelled out 10,000 yuan, the equivalent of about $1,300, for cardboard boxes full of black ants, purportedly rare ones sometimes used in China to make medicines and wine but actually worth about $25.

Over two years, more than 36,700 residents of 12 towns in China's northeastern Liaoning province were tricked out of nearly $400 million, resulting in many of them losing their life savings. At least one investor committed suicide.

Don’t get me wrong. I will never lose my faith in capitalism; I’m an investor to the core and I understand the concept of “risk.” But this one shook me up. I had already lost a bundle in the “fake plastic bull balls that you hang off the trailer hitch on the back of your pickup truck” industry. (The government stepped in and decided to regulate, which killed the money I’d put into “fake bull balls” futures; it stopped market speculation cold and I got left holding the bag.)

And now this headline, which made me do a spit-take over the tea, marmalade and toast this morning. The Chinese ant farm agribusiness sector--wiped out!

I came in to this one with my eyes wide open. When my broker (E. F. Nuttin) tipped me off to the possibilities in the burgeoning Chinese ant farm market, he warned me about the downside. He had to, it’s the law. But the prospectus looked so good—a potential market of billions of Chinese, standing around with their yuans clutched in their hands and telling each other “One day, one day, comrade, a day will come when the Party will reform the property laws and we will be able to buy that little ant farm we always dreamed of.”

We were positioned, man, we were right there, present at the creation! We were on the runway, ready to take off! I didn’t put everything into one company, either—I bought a basket of bonds in Chinese ant farm companies. Even if one company turned out to be a dog, they couldn’t all go down the tube, one of them had to emerge as the dominant player in the market. True, most of my stuff was Chinese ant farm junk bonds (high risk, but with a very high rate of return)—but I cut my financial teeth in the Eighties; I know the Milken wisdom: that a portfolio of high-risk ant bonds would pay out more than triple-A rated bonds on any other insect.

And for awhile, times were good. Champagne wishes, caviar dreams: when I was at a white tie affair, lighting my cigar with a hundred dollar bill, and some Fortune 500 junior executive pup would impertinently ask me, “What’s your line, Prendergast?” I’d waggle my eyebrows at him and answer proudly: “Ants!” He’d stare at me in disbelief, and I’d elaborate: “Chinese ants! They work like motherfuckers, that’s all they do is work, it’s better than Walmart. And if they ask about a health care plan you can step on ‘em, and the law can’t do a thing!” The kid’s eyes would light up, all greedy like, and he’d ask me how he could get in, and all I’d do is just give him my nicest “up yours” grin and flick my cigar ash into his drink.

And now the whole thing washes out; it turns out that my biggest guy was a crook running some kind of an ant Ponzi scheme, selling Chinese widows and orphans “Gummi Ants” instead of the real thing. Christ, how low can you go? Defrauding people out of their life savings by selling them fake ants? What is this, Enron all over again? Death penalty’s too good for the crooked prick.

And now here I am stuck with a billion cardboard boxes of dead ants on container cars in Shanghai, and a warehouse full of fake plastic bull balls that I can’t even sell in Maryland anymore.

Well, that’s capitalism. At least I didn’t put the money into the airlines.

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At 9:37 AM, Blogger ChinaLawBlog said...

They weren't just overpriced. He claimed they had medicinal qualities they did not. He also made around $385 million from the sales. I am certainly not justifying the execution, but this sort of thing is a big problem in China, and one the government (quite obviously) takes very seriously. My firm has helped in defending foreigners who have gotten caught on the wrong side of Chinese law in similar cases and the law is applied the same way to foreigners. China is NOT a place to go if you are planning to engage in fraud.


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