Nasdaq-listed firm caught up in 83-tonne fake gold bars scam

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A Wuhan-based jewelry maker said officials in China are investigating allegations the Nasdaq-listed company used fake gold bars to secure loans from Chinese financial institutions.

Reports in Chinese media in the past month raised questions about whether Kingold Jewelry Inc. had pledged 83 tons of gold that mainly consisted of copper alloy to secure loans. According to a report by the Chinese news outlet Caixin, the issue was flagged when some of the supposed gold was sent for quality checks earlier this year after the company failed to pay interest on a loan.

“The scale of this alleged fraud that Kingold is being accused of is simply staggering”

Ed Moy, former director of the U.S. Mint

The government investigation was launched into “the facts related to certain allegations regarding the adequacy and integrity of gold in the control of the lenders that was used as collateral to secure the loans,” Kingold said in a filing dated Tuesday.

In an added twist, the company said it was unable to retain independent investigators to look into the matter because all of its bank accounts have been frozen “as a result of various legal proceedings.”

“The scale of this alleged fraud that Kingold is being accused of is simply staggering,” Ed Moy, a former director of the U.S. Mint, said by email. “Fraud of this magnitude needs some type of enabling like a lax regulatory environment or compliance, and/or favoritism and corruption.”

US scrutiny

Kingold didn’t immediately respond to phone calls outside normal business hours in China or to two numbers listed in the U.S. Caixin reported in June that a company representative denied earlier that month there had been any problems with the gold, but then hadn’t answered subsequent calls.

The controversy engulfing Kingold follows cases of other U.S.-listed Chinese companies that have faced scrutiny. Among them, Luckin Coffee Inc., a once high-flying Chinese company that took on Starbucks Corp., saw its shares plummet in April after it was rocked by an accounting scandal.

The controversies have been underscored by intensifying tensions between China and the U.S., and Congress has considered legislation that could bar Chinese companies from trading on U.S. stock exchanges.

“If the current controversy about Kingold proves to be true this could be devastating to multiple Chinese companies and further drive a wedge between America and Chinese investment,” Peter Thomas, a senior vice president at Chicago-based broker Zaner Group, said by phone.

Falling shares

Kingold Jewelry has plunged almost 60% in New York since the Caixin article was published in late June. The shares fell further Wednesday, sending the stock toward its lowest close since 2009. In late June, the Shanghai Gold Exchange revoked membership for Kingold affiliate Wuhan Kingold due to its “violation of membership management measures.”

The Kingold situation could help boost gold’s positive outlook, according to Tai Wong, head of metals derivatives trading at BMO Capital Markets.

“Market confidence in gold’s rally is quite remarkable with virtually every analyst of note projecting gains,” Wong said by email. “In such an environment, even scandals about the purity and provenance of gold may serve to boost the legitimate metal’s prospects.”

According to the Caixin report, the allegedly fake gold bars first came to light when Kingold failed to pay interest to one of its lenders, Dongguan Trust, late last year. In the filing, Kingold said Bank of Zhangjiakou, a regional commercial bank, issued a notice in early July after it failed to pay interest from February to June.

Kingold’s operations were hobbled due to lockdowns in its home base of Wuhan, the city at the center of Chinese efforts to fight the original coronavirus outbreak. The crisis and its aftermath have greatly affected the company’s business, according to the filing.

(By Yvonne Yue Li, with assistance from Jack Farchy)

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