Four and a half years of financial fraud: Easy Show Display's actual controller fined 100 million yuan and banned for 7 years

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Reprinted from: China Business News

An intern reporter of CING, Wang Lingning; reporter Xia Xin, Beijing report

On April 3, Shenzhen Yishang Display Co., Ltd. (stock short name: R Yishang 1; stock code: 400188.NQ; hereinafter referred to as “Yishang Display”) announced that the company and its controlling shareholder, as well as relevant directors, supervisors, and senior management, have recently received an《Administrative Penalty Decision Letter》issued by the China Securities Regulatory Commission Shenzhen Regulatory Bureau. According to the investigation, the company had two major illegal acts—false entries in periodic reports and failure to disclose related-party transactions in accordance with law—resulting in multiple former senior executives being issued warnings, fines, and market-entry prohibitions.

Yishang Display said that this penalty does not involve any risk that the listing will be terminated, but it admits that the fines will have an adverse impact on financial conditions such as cash flow. The company pledges to strictly implement rectification and to faithfully fulfill its information disclosure obligations.

This case involves financial fraud violations that span a long period of time and involve a large amount of funds, and it was carried out under the guidance of the actual controller, making it highly typical.

Financial fraud continued for four and a half years

According to the penalty decision letter, Yishang Display systematically inflated its operating revenue and profits for the first halves of 2018 through 2022 by fabricating business activities. For the five reporting periods, the overstated revenue amounted to approximately 86.04 million yuan, 78.56 million yuan, 326 million yuan, 319 million yuan, and 70.33 million yuan, respectively.

Of particular note, in 2021, the proportion of overstated revenue compared with the disclosed amount for the period had already risen as high as 39.73%; in the first half of 2022, it further increased to 53.91%, meaning that more than half of the company’s revenues reported publicly at that time were actually fabricated.

Meanwhile, the company’s controlling shareholder and then-chairman Liu Menglong also took the lead in arranging subordinates to transfer company funds through means such as fabricating payments, which were used to repay his personal debts, constituting non-operational fund occupation by the controlling shareholder. The amounts of fund occupation in 2020 and 2021 were approximately 93.16 million yuan and 9.2 million yuan, respectively; however, the company failed to disclose them in a timely manner as required, and the relevant information was also not stated in the annual reports, constituting a major omission. The occupied funds had been fully repaid by the end of June 2022.

Liu Menglong, the actual controller, was fined 10 million yuan

In terms of the severity of the penalties, the regulator took measures against the main responsible persons at the maximum level or close to the maximum level.

As the core responsible person who organized and implemented the financial fraud and fund occupation, Liu Menglong was warned and fined 10 million yuan. Among this, 3 million yuan was imposed for his role as the directly responsible supervisor, and 7 million yuan was imposed for his illegal acts as the controlling shareholder and actual controller.

At the same time, Liu Menglong was subject to a 7-year prohibition from entering the securities market. According to the materials, Liu Menglong was born in January 1955, has a college junior college education, and has previously received honors such as the Second Prize of the Guangdong Provincial Science and Technology Award, the First Prize of the Shenzhen Technological Invention Award, the Outstanding Talent Award of Shenzhen’s Futian District, and awards such as being named one of the “Top 100 Industry Leaders.”

Yishang Display’s then chief financial officer Peng Kangxin, due to knowing about and participating in some of the conduct involved in the case, was warned, fined 2.5 million yuan, and prohibited from entering the market for 4 years. Peng Kangxin argued that his level of participation was relatively low and that during sick leave he could not actually perform his duties. After the Shenzhen Regulatory Bureau reviewed and rechecked the matter, it determined that the above circumstances do not constitute a basis to exempt him from his statutory guarantee responsibilities, and it maintained the finding that he was identified as a “person in charge.”

The then person-in-charge of the accounting institution, Cheng Shiyu, was fined 1.5 million yuan and prohibited from entering the market for 3 years; the then deputy general manager, Zhao Ruiyuan, was fined 75 million yuan; and the then directors, Zhong Tianhua, Wang Zhenqiang, and Chen Huanhong, were each fined 50 million yuan. The company itself was ordered to make corrections, given a warning, and fined 70 million yuan.

According to the materials, Yishang Display was established in 2004, and its main business covers terminal display, circular exhibition, virtual exhibitions, trade services, and more. In April 2015, the company listed on the Shenzhen Stock Exchange’s SME Board and issued shares at an issue price of 10.48 yuan per share. After listing, the company successively attached concept labels such as 3D printing, VR, and the metaverse, and its stock price was once driven up to a high of 217.88 yuan per share. Such a large rise also placed Yishang Display’s stock price increase among the “Top Ten Bull Stocks” of 2015 as the third-highest, behind only Storm Technology and Chinese Online.

(Editor: Xia Xin; Reviewer: Li Huimin; Proofreader: Yan Yuxia)

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