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SCMP Reporter

Details of a pyramid scheme which milked investors of 899 million yuan (HK$836 million) have emerged in local newspaper reports.

 The Three Star Industrial Company, based in Zhengzhou, Henan province, was shut down in May.

 Fourteen executives, including boss Li Guofa and his mistress Yang Bin, were arrested after authorities discovered it had been 'illegally procuring funds from the public'.

 The scam is one of the biggest since the Wuxi pyramid scheme scandal, uncovered in 1993, which led to the downfall of former Beijing party secretary Chen Xitong.

 According to Henan's Dahe Daily, Li's empire invested in Hong Kong. It was reported to have paid more than eight million yuan to advertise on troubled China Entertainment Television Broadcast, owned by Robert Chua Wah-peng, in March.

 The newspaper said Li's company enticed institutions and investors by offering interest rates of up to 31.2 per cent on one-year deposits, compared with an official bank rate of about three per cent. Li founded the company in 1992. It expanded into a huge concern, with 60 branches, and owned 10 other firms.

 In 1995, facing severe production losses and financial difficulties, Li launched a new 'flexi-sales' scheme. Recruits who paid a 20,000 yuan deposit would become gold card employees and would receive monthly payments of 480 yuan. Those who paid deposits of 10,000 yuan would become silver card employees and receive 260 yuan a month.

 Such 'honorary employees' were asked to take products home to sell, which could be returned to the firm at no cost if unsold. While few sales were achieved, gold and silver card holders enjoyed interest rates of 31.2 and 28.8 per cent on their deposits.

 Li's company paid the interest by selling more gold and silver cards to new waves of recruits. But in March, recruits who did not receive payments on time alerted authorities.

 The authorities began to investigate Li in February and formally arrested him and Yang in May. So far, police have recovered 112 million yuan. Li is expected to be put on trial.



Facts behind pyramid firm fraud emerge