Leshi Founder Ordered Back to China to Sort Out Finance Woes

(Bloomberg) -- China's stock regulator issued an order late Monday for Leshi founder Jia Yueting to return to the country before the end of the year to deal with the company's financial woes.

The China Securities Regulatory Commission said that despite repeated calls from the regulator, the founder has yet to show up and deliver on his promise to provide interest-free loans to the Shenzhen-listed Leshi Internet Information & Technology Corp. mired in "huge amount of debt." The CSRC has been pushing for Jia's return since September.

"The debt has yet to paid back," the agency said in a statement. "It has severely hurt the interest of the listed company and investors and has had an extremely adverse social impact."

Jia made his fortune at Leshi with a video-streaming service similar to Netflix, but he borrowed heavily against his shares in the company to expand into new ventures, including smartphones and electronics. He more recently ceded his positions at Leshi to focus on making electric cars and has been struggling to raise capital to fund the venture, Faraday & Future Inc.

A Leshi representative declined to comment on the CSRC statement. Faraday didn't respond to calls and emails for comment. It's not clear where Jia is, though Faraday has operations in the U.S.

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The CSRC may not have the authority to force Jia back to China, but it is a sign of increased efforts to protect investors in the country's fledgling stock market. The regulator has imposed steep financial penalties on alleged market manipulators this year. In March, it ordered one individual to pay penalties of 3.47 billion yuan ($529 million) for violations on disclosures and manipulation and another to pay 1.17 billion yuan in two cases of manipulation.

“China is stepping up efforts in securities supervision, and the CSRC can't let its credibility be challenged by a case like this one,” said Dong Zhiyi, a Shanghai-based attorney with Yida Law Firm. “I've never heard of CSRC issuing such a statement asking for a shareholder's return.”

In a statement issued by Leshi in October, it said Jia had promised in 2015 to make two interest-free loans payable in ten years or more worth a combined total of 5.7 billion yuan, while his sister Jia Yuefang had agreed to make loans valued at 1.7 billion yuan. Trading in Leshi shares has been halted since April.

To contact Bloomberg News staff for this story: Dong Lyu in Beijing at dlyu3@bloomberg.net, Gao Yuan in Beijing at ygao199@bloomberg.net.

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Peter Elstrom, John Liu

©2017 Bloomberg L.P.

With assistance from Dong Lyu, Gao Yuan