Hall of Shame
CNinsure (CISG US)
CNinsure (now known as Fanhua, Inc.) operated an independent Chinese insurance agency and brokerage company. The Company provides wealth management, property, casualty, and life products, as well as consumer finance, insurance claims adjusting services, such as damage assessments, surveys, authentications, and loss estimations.
It started trading on the NASDAQ in October 2007 after raising US$216.43M. In July 2010 it raised another US$155M in an additional share offering.
November 22, 2010, OLP Global LLP issued an analyst report predicting that new regulations promulgated by the China Insurance Regulatory Commission restricting the payment of equity incentive compensation would:
(i) slow CNinsure's aggressive hiring of sales agents, thereby leading to lower revenue growth; and
(ii) cause CNinsure to raise standard cash commissions, thereby leading to an increase in overall compensation expenses.
December 2, 2010, OLP Global issued a follow up report, "CNinsure (CISG) - Equity Incentives Likely Unaccounted For, Overstating Profits", alleging that the company had understated commission expenses and overstated net income as a result of the way the company incentivises its agents, which the report said is "no different from an equity-based compensation plan." The company claimed that the incentives given to its agents "should not be recognised as costs", which is in contradiction to U.S. GAAP, as those incentives are reasonably likely to be tendered at a future date. OLP also raised questions about the acquisition practices of the company. The company acquired an e-commerce platform, InsCom, in July 2010 for RMB 84m. However, in December 2010, the company's head of P&C business acquired InsCom for only RMB 28,500 from the company.
December 6, 2010, CNinsure issued a press release stating that:
(1) "the so-called share incentive certificate. is nothing but [a] scorecard for points";
(2) "Finestart does not have any interest or economic ties with CNinsure";
(3) "the Company has never published any presentation on share incentive certificate[s]"; and
(4) "any publication that describes CNinsure's scorecard system as a share incentive is not in conformity with fact."
Later that day, OLP released additional supporting documentation showing that the presentation and other evidence cited in the December 2 and December 3 reports originated from CNinsure's company server.
December 13, 2010 and January 6, 2011, OLP published follow-up reports and supporting documentation, which make clear that the equity incentive compensation scheme described in OLP's earlier reports was not merely an unauthorized presentation that misrepresented CNinsure's compensation system. On the contrary, the equity incentive compensation scheme (including share ownership in Finestart) had been widely promoted to sales agents for years by the Company's senior management.
CNinsure’s stock crashed in the wake of allegations of fraud, followed by an abrupt collapse in its growth rate and margins. CISG became an abandoned stock and hovered between $5 and $8 for years, an impressive feat relative to the de-listings and bankruptcies among its cohort. The company then changed its name to Fanhua (FANH) in December 2016.
In 2018/19, there were further allegations of fraud against Fanhua when three Short-sellers issued reports between August 2018 and Frbruary 2019, see here for details.
Motley Fool: CNinsure Shares Plunged - What You Need to Know, 2 Dec 2010
Street Insider: OLP Global Highlights More Red Flags On CNinsure, 13 Apr 2011
Shareholders Foundation: CNinsure - Under Investor Investigation Over Possible Securities Laws Violations, 7 Dec 2010
Shareholders Foundation: CNinsure - Investor Securities Class Action Lawsuit, 17 Oct 2011
US District Court: Securities Class Action, 17 Oct 2011
CNinsure: News: Change of Name, 6 Dec 2016
CNinsure: Annual Report 2010
CNinsure: Annual Report 2009