Nasdaq-listed company sued for backing $ 2 billion in loans with 83 tons of fake gold

Nasdaq-listed company sued for backing $ 2 billion in loans with 83 tons of fake gold - fake gold 1024x576The listed company with its own Nasdaq shares which allegedly used 83 tons of fake gold bars as collateral to obtain loans worth around $ 2 billion from multiple Chinese financial institutions is now in default and faces multiple lawsuits.

$ 2 billion of fake gold

It is Kingold Jewelry Inc. based in Wuhan, China, but listed on Nasdaq in the United States under the symbol KGJI, the company involved in the fake gold scandal. After the news broke, the Chinese firm informed the Nasdaq in a statement that it had received insolvency notices of approximately RMB 10 billion ($ 1,44 billion) from seven Chinese lenders.

These loans were backed by gold bars which turned out to be an alloy of gilded copper. The Shanghai Gold Exchange (SGE) has also revoked membership of Kingold and the Chinese authorities have launched a fraud investigation.

Additionally, a series of lawsuits have been filed against Kingold as the company's stock price plunged 24,11% on June 29 following the fake gold news. A class action lawsuit was filed by the Rosen law firm in the United States Court for the Eastern District of New York for violations of federal securities laws.

The lawsuit blames Kingold, its president Jia Zhihong and former CFO Bin Liu as defendants for managing the company fraudulently and for misleading investors. Law firms Pomerantz and Bronstein, Gewirtz and Grossman also filed a class action lawsuit against Kingold, its CEO and former CFO.

Improve internal controls and risk management to prevent fraud

In a July document filed with the US Securities and Exchange Commission (SEC), Kingold said its operations in Wuhan "have been significantly impacted by disclosed loan defaults, related loan disputes, various litigation and the consequent freezing of bank accounts ".

Additionally, the company's jewelry production was halted between January and early April due to the covid-19 outbreak and the Wuhan lockdown. To help small investors in China recoup investment losses from large companies, China's supreme court last week gave the green light to a historic class action system for retail investors.

The system will provide a "convenient and low-cost complaint channel" for small and medium-sized investors and will be a strong deterrent for financial criminals. Chinese market regulators are investigating Kingold Jewelry for the allegation of fake gold, calling for stricter risk management.

“In addition to the problems associated with the company itself, the incident also revealed that the internal controls and risk management of some financial institutions turned out to be hollow shells,” said the China Banking and Insurance Regulatory Commission.