What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stockton, investing today we're having a look at one of the most bizarre corporate frauds to take place in china in the past decade. We're talking about a little-known chinese seafood company called zoneco throughout the early to mid 2010s zoniko grew to become one of the biggest seafood companies in china and boasted a market capitalization of billions of dollars on the shenzhen stock exchange. However, it turns out they are running a massive fraud. Corrupt executives within the company potentially stole millions of dollars worth of scallops in a scheme that lasted at least four years when their fraud was exposed.

In 2018, the stock price immediately fell by 50 and has languished in penny stock territory. Since then, in this video we'll go over. What zoneco is how they were able to build billions of dollars worth of market valuation with fake scallops and how all can crumbling down founded in 1958, zoneco, primarily engages in the production and sale of seafood. Their biggest product is scallops which they grow in their marine ranch.

Scallops are a mainstay of many five-star restaurants and can accordingly command high prices. If you can find a way to farm them at scale, you could make an extremely lucrative enterprise and that's exactly what zonico did, or at least they claimed. In 2006, they ipoded on the shenzhen stock exchange to raise capital for their expansion plans. They used this money to build a giant aquaculture plant called the zonico marine ranch.

They said it was the only sustainable scallop aquaculture operation in china. Specifically, they farmed the yeso breed of scallop, which is native to northern asia as renowned for its texture and flavor by the mid-2010s, it looked like their strategy was working. Their revenue increased steadily up to 500 million dollars in 2017.. In 2016, they reported a net profit of more than 12 million dollars, which proved to investors that they could turn their innovative aquaculture technology into a profitable operation.

That's why it came as such a shock when they reported a 113 million dollar loss for 2017.. When this news was released, hundreds of millions of dollars worth of market value vanished overnight when the stock price lost 50 percent of its value. The company needed to give an explanation to their investors as to how they could have lost so much money. They put out a statement, saying quote: we have found out that the inventory level of our yesos scallops farmed in the sea appeared to be abnormal.

As such, we plan to make an impairment provision or a write-off for some of our scallop inventories for last year, which is expected to lead to a net loss for the company during the period unquote, apparently, the scallops in their farm had somehow disappeared. Wild scallops have been observed, swimming short distances in the water, but their lack of arms and legs makes it impossible for them to climb outside the water. This made it extremely surprising that they could have escaped from zonico's aquaculture ranch. The company later clarified that unfavorable water temperatures reduced the number of organisms in the water which the scallops could eat.

This caused the scallops to starve and a large portion of them died ultimately leading to lower than expected yields. The chinese securities regulators opened an investigation into the company to determine whether or not zoneco misled investors about how many scallops they expected to farm. While it's certainly possible that he just got unlucky with the scallop yield, there were other relevant circumstances which made it highly suspicious. It was revealed that a fund related to senior zonico executives sold more than 2 million shares before the unfavorable news was announced.

This gave the appearance of insider trading and possibly a pump and dump scheme whereby executives made. Investors believe that the farms would have high scallop production causing prices to stay elevated. This would allow the executives to dump their shares at high prices before the news was released. Additionally, this wasn't even the first time zonico had a suspicious scallop incident back in 2014.

They had a similar disaster where seven billion scallops worth almost 140 million dollars disappeared from their farm. This was a devastating loss as scallops take four to five years to grow from an egg to full size. They blamed the loss on an unexpected cold current which flowed into the yellow sea, killing almost their entire scallop farm. This was a highly suspicious explanation, as meteorologists had not forecasted any cold water fronts.

Even more surprisingly, no other fisheries in the area had experienced any losses. It was as if the cold water only impacted zoniko's farm and no others in both the 2017 and 2014 incidents. The company gave no warning to investors about the potential for losses until they finally came out and said everything was destroyed. They claimed that, because the scallops live so deep underwater, they have no way of ascertaining the health of the crop until they try to harvest them and see that they are all either dead or missing.

In 2019, the chinese publication yitai global conducted an investigation into zonako to see if there was anything fishy going on with the seafood company, no pun intended. According to residents of zoniko's home city of zhang, zhi dao, the stories about cold water killing the scallops was a fabrication meant to hide serious commercial fraud that the company was engaged in to understand the fraud. You have to understand how scalloped farming works from the time. A baby scalp hatches it takes a minimum of three years before it's big enough to be sold.

In many cases it takes four to five years. The long life cycle is the main reason why they are so expensive. Zonico would allegedly harvest their scallops after just one year when they were still small. They would then buy empty three-year-old shells for a very cheap price.

They removed the one-year-old scallops from their shells and put them into the larger three-year-old shells and fraudulently sold them as if they were three-year-old scallops. The proceeds of these fraudulent sales were likely embezzled by corrupt executives within the company. Nobody knows for sure how much money was made from this or where the money went. But now the company had a big problem.

All of their scallops were harvested after one year by the third year when they were supposed to be harvested. The farms were already empty. In an effort to cover up the fraud, they would buy fully grown scallops from fisheries in japan, korea and other parts of china. They would repackage them and sell them saying that they're from their own farm.

Of course, this practice was not sustainable. They could only sell the scallops for roughly the same prices that they bought them for when adding the transportation and repackaging costs, they ended up selling them at huge losses. Eventually, the fraud became too big to hide, so they made up a story about unfavorable weather conditions, killing off their crop. This is allegedly what happened in both 2014 and 2017..

Interestingly, these two disasters were just three years apart, which is the same amount of time that they claimed it took them to raise their scallops. This indicates that after the 2014 incident, they immediately went back to their old tricks of harvesting the scallops after just one year, and they were able to keep this up all the way until 2017, when the next batch was supposed to be harvested after the first incident. In 2014, the chinese regulators looked into the matter, but failed to find any wrongdoing. But after the second incident in 2017, things were getting too suspicious to ignore.

After a multi-year investigation, the chinese securities regulatory commission charged zonako with financial fraud, major defects and internal control and the suspected failure to disclose information in a timely manner. They fined the company six hundred thousand chinese yuan or approximately one hundred thousand us dollars chairman wu ho gong was given a lifetime ban on serving on the board of any publicly traded company. The securities regulators also passed the case along to the public prosecutors, so zonico executives involved in the fraud may now face criminal prosecution and prison time. The company's financial condition has deteriorated since the scandal, with revenue down roughly 40 percent by 2020, but given the company's track record of fraud, even these numbers are questionable.

In 2019, the local government sent independent aquaculture experts to conduct tests in the waters around zonicos farms. They found that the area was not ideal for scallop farming and the farm was probably never commercially viable. While the company is still operating, it appears to be winding down. They haven't posted any press releases on their website since the scandal starts to unfold in the beginning of 2018..

Their stock continues to trade on the shenzhen stock exchange, but has hovered around penny stock status for the past couple years. Needless to say, the future prospects for this company probably aren't great, alright guys that wraps it up for this video. What do you think about zone and co's scallop scandal? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.