China slaps record fine, jail term on hedge fund trader amid crackdown on ‘financial crocs’

China’s courts have slapped a record fine and imposed a jail term on the country’s so-called hedge fund king after finding him guilty of insider trading and market manipulation, amid a state-directed campaign to crack down on financial malfeasance and bring “financial crocs” to justice.

Xu Xiang (徐翔), whose Shanghai Zexi Investment fund had as much as 20 billion yuan of assets under management, was fined 11 billion yuan, according to a report on Sohu Finance, a news aggregator, citing information from a court in Qingdao (青島), Shandong (山東) province.

The fine is the largest ever imposed in China for a financial misdemeanour.

Xu, 39, was also sentenced to five-and-a-half years in jail and had 9.3 billion yuan of “ill-gotten” assets amassed by him and two associates confiscated by the state, the news portal said.

Xu could not be reached for comment. The report said Xu would not appeal against the sentence.

Chinese regulators and prosecutors are tightening the screws on traders and corporate raiders who are perceived to have taken advantage of regulatory gaps to enrich themselves, particularly during the 2015 equity market crash that wiped out trillions of yuan of wealth.

Scrutiny is being placed on companies that breach financial regulations to build their takeover funds, or those that exploit insider information.

“Beijing is punishing Xu in an attempt to send a warning across the entire financial industry – wrongdoers caught by the authorities will suffer severe losses no matter how prominent they are,” said Oliver Rui, a professor of finance and accounting at the China European International Business School.

Last week, top securities regulator Liu Shiyu took the unusual step of criticising traders and corporate raiders, vowing to bring the so-called “financial crocs” to justice.

In association with the vow,tycoon Xiao Jianhua was taken back from Hong Kong to the mainland just before the Lunar New Year to help with investigations into alleged market manipulation.

Xiao is the founder of financial group Tomorrow Holdings and had lived at the luxury Four Seasons Hotel in recent years.

“China’s stock market used to be likened to a ‘dangerous casino’, and we now see a clear determination from the securities regulators, and even the [country’s] top leadership, to clamp down on financial malfeasance,” Rui said.

Xu, who was arrested in late 2015 after a meltdown in China’s stock market, was born to a well-to-do family in Ningbo (寧波), Zhejiang (浙江) province. At the age of 17, he dropped out of school to focus on stock trading.

Over two decades, he had taught himself stock trading, building his portfolio into a multibillion-yuan empire, according to a profile by the Economic Information Daily, a newspaper affiliated with the state news agency Xinhua.

Xu, who earned an estimated 4.9 billion yuan from trading in the markets, soon parlayed his capital gains into direct and indirect stakes in more than 12 public companies.

Between 2010 and 2015, Xu conspired with the chairmen and senior executives of as many as 13 publicly traded companies to take advantage of inside information for their capital gains, Sohu Finance said, citing a statement on the court’s verdict.

Xu named his fund Zexi (澤熙), taking a character each from the names of two of the Chinese leaders he admired most – Mao Zedong and emperor Kangxi.

For the first 11 months of 2015, Zexi earned 300 per cent in returns for two of its funds, a standout performance while the country’s stock market went into meltdown and lost trillions of yuan in value.

Xu was arrested on November 1, 2015, and formally charged with insider trading and market manipulation in April last year.