China's lending scam victims seek state compensation

Updated: 2012-02-29 00:49


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HANGZHOU - Nearly 150 creditors have sought state compensation over a large-scale lending default estimated to have left 7,000 private creditors a whopping 4.5 billion yuan (714 million US dollars) out of pocket in East China, local court officials said Tuesday.

The litigation, filed by 147 creditors of Liren Education Group with the intermediate court of Wenzhou city in Zhejiang province, accused the county government of Taishun and its police department of neglect in supervision and sought 68.64 million yuan in compensation.

The county government and police turned a blind eye to Liren's lending scam, especially allowing the company to gather nearly 900 million yuan from private creditors on the false promise of high returns in the final four months before bankruptcy, according to the litigation, adding that some officials even participated in the scam themselves.

The creditors filing the lawsuit mostly come from nearby counties. One individual claim amounts to 3.94 million yuan in default debts, court officials said.

Liren used to own 36 schools and companies across the country, operating in sectors such as education, real estate and mining. Last October, the group said it would stop repaying creditors. Police detained the boss Dong Shunsheng on February 3 for alleged fundraising fraud.

Most of the company's investment came from private lending. Paying high interest for years led to Liren's downfall, investigators earlier said.

When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors, they added.

Liren's downfall again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy.

Last year, a survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors because small companies have difficulties securing loans from banks.

During last year's credit crunch, about 100 managers or leaders of private companies in Wenzhou were reported to have disappeared, committed suicide or declared bankruptcy -- invalidating debts of about 10 billion yuan by the end of October.