Fraud, inept management, lax regulation and a collapsing stock market - these are the factors that brought down China's fifth-largest brokerage, leaving 20 billion yuan in debt and a lawsuit against four executives for funnelling US$780 million offshore. On May 10, the China Securities Regulatory Commission (CSRC) revoked the licence of China Southern Securities, one of the biggest names in the brokerage industry, with revenue last year of 711 million yuan and more than 80 branches nationwide. It ranks as one of the biggest corporate failures in the 15 years of the mainland market and raises many questions as to how it incurred such enormous debts and why the regulators did not act sooner to protect the interests of its clients. Investors have become so accustomed to malpractice and losses in the industry the closure did not arouse the public indignation that the scale of fraud and mismanagement probably merited. 'When people heard the news, they were numb,' said Zhang Qi, an analyst at Haitong Securities. 'They were neither excited nor surprised.' The Shanghai market, meanwhile, continues its long-term decline, having fallen 12 per cent since the start of the year after ranking as the world's worst-performing major index last year. The authorities are scrambling to find ways to avoid protest from the thousands of the brokerage's clients and to cover its debts. As is usual in such cases, individual depositors will get preference. They have until August 19 to register for the money owed to them at China Southern offices, which are being kept open for the purpose. Under official regulations published in November, individuals will receive 100 per cent of their money up to 100,000 yuan and 90 per cent of the amount above that figure. China Southern has sufficient funds to cover this because in February, the People's Bank of China made it a special loan of eight billion yuan. But there is no money to repay the 12 billion yuan owed to institutions, mainly banks and corporate customers, who entrusted the brokerage with funds for management and the trading of stocks and bonds. In addition, the central bank wants repayment of its loan and is insisting that any buyer of China Southern's assets agree to accept this obligation. The most likely purchaser is China Jianyin Investment Company, set up last September when China Construction Bank spun off its non-banking business. The CSRC prefers Jianyin as the buyer as it has both securities and non-securities assets and will assume the debt owed to the central bank. The closure raises questions as to how such a big brokerage could go bankrupt and why the CSRC did not act sooner, if not to prevent it, at least to minimise the losses. Peng Yunliang, an analyst at Shanghai Securities, said that there were too many reasons for the closure. 'One is the long-term fall of the market. It is half of its peak. The other was the chaotic management, with investment of money in many sectors outside the securities industry.' A second analyst, who declined to be named, laid the blame on the market, mismanagement and waste of funds by the brokerage's executives and mistakes by the regulator. The CSRC was first warned of the seriousness of the situation in July 2003 and asked the city government of Shenzhen, where China Southern is based, to take responsibility. But the Shenzhen government had no stake in the brokerage and declined to take action. On January 2 last year, the government took over the brokerage. According to the latest issue of Caijing, the amount of clients' money that China Southern had embezzled doubled between July and December 2003 from less than 10 billion to nearly 20 billion yuan. For 16 months, the CSRC had been trying to find someone to take over the brokerage. The front-runner was the China Development Bank, which would have obtained precious investment bank and brokerage licences in exchange for paying back the central bank's loan of eight billion yuan. But, after intense debate within the government, the China Banking Regulatory Commission vetoed the plan, saying that the lender was a policy bank, not a commercial bank, and so could not be allowed to move into the securities industry. That left the CSRC no option but to shut down the brokerage. Founded in 1992 with capital of one billion yuan, China Southern was typical of the Wild West character of China's securities industry. Between 1993 and 1995, it set up subsidiaries that invested millions of yuan in many sectors outside broking, including in property projects in mainland cities. In 2000, it began to expand its capital base, which rose to 3.45 billion yuan in February 2001 with nearly 70 shareholders. From 2000, it diversified into wealth management, accepting billions of yuan. Many of the property investments failed and the three-year decline of the stock market killed any hope of recovery. The siphoning off of money offshore, involving four executives of its international operations division, was even more serious. According to a lawsuit filed in a Shenzhen court that came to light this month, the four used accounts in foreign banks for trading B shares, denominated in foreign currency, to move US$780 million in 16 transactions over four years from March 1998 to accounts held in the United States.