Without any warning, two judges appeared in a dark six-square-meter arraignment room on the afternoon of July 20th, 2017 and announced the verdict to Dai Xiaoquan, who slightly leaned against the interrogation chair: “CellOn is guilty of evading RMB 3.39 million tax, and thus Dai Xiaoquan, as the legal person of CellOn, is sentenced two years in jail.”

Dumbfounded, Dai buried himself in his hands.

After a while, he recovered himself and said: “I want to appeal.”

A few hours earlier, at around 8 o’clock AM, July 20th, 2017, Xie Min, Dai’s attorney, had a meeting with Zhou Tun, Chief Judge of the Criminal Tribunal of Gongqingcheng Court. During the meeting, Zhou told Xie that they hadn’t decided on the sentencing time, and promised that the verdict would be sent to Xie if he wasn’t in Jiangxi province. Therefore, Xie even applied to the court for bail.

At 11 o’clock AM, Xie met Zhang Zhijian, vice mayor of Gongqingcheng and an active “player” in the latest negotiation round of restructuring,

At 3 o’clock PM, Xie was the first to apply to visit Dai at De’an County Detention Center, Jiang’xi province.

Twenty minutes later, two judges appeared at the detention center and announced the verdict.

A month later, on August 16th, the Supreme Court of PRC issued Several Suggestions on Providing Judicial Guarantee to Improve Business Environment. On September 25th, the State Council issued Suggestions on Creating a Favorable Environment for Enterprises, Upholding Entrepreneurial Spirits and Maximizing the Role of Entrepreneurs… For sure, these positive signals from the Chinese government for private entrepreneurs would be like a shot in the arm for the Chinese market, especially the tech and innovation industry. It is exactly on this occasion that TMTPost’s research & analysis team carried out a field research into the status quo of the Chinese science , tech and innovation industry. However, we accidentally learned bout “the CellOn Incident”, a household case in Jiangxi province.

For many friends and insiders in the Chinese smartphone circle, Dai has been gone for quite a while.

However, how is it that a star tech startup, a key tax contributor to Gongqingcheng, the second largest enterprise in Jiujiang area, end up evading $ 3.39 million in taxes? How is it that its founder end up in jail?

What happened, exactly? Few people knew. To find out the truth, TMTPost carried out a two-month research and went to several places to interview relevant personnel in an attempt to unravel the myth behind CellOn’s death. To our surprise, although Dai was already held behind bars, when we tried to interview his classmates and friends, they all stood up for Dai and aired their grievance.

CellOn, once a high-tech enterprise in the Chinese tech circle, not only provided tech services for global smartphone users, but also made huge contribution to local employment, tax revenue and economy. Dai Xiaoquan, founder of CellOn, also had quite a fancy resume. As a returnee, he was once a star entrepreneur in the Chinese tech circle. However, everything changed was crushed into ruins after the change of the local government.

After CellOn was caught in the “debt withdrawal” crisis, it had five times to restructure itself. However, owing to the inappropriate behavior of some local officials, CellOn missed all these opportunities. From being detained for two months and asked of stakes, to being arrested as individuals for “tax evasion”, and then to being arrested as legal person of CellOn for “tax evasion”, Dai ended up with no other alternatives on his entrepreneurial path. Without the founder, CellOn is destined to plunge into the abyss.

When we look back at the entire “CellOn Incident”, we might find that it has to do with several parties, from private enterprises, local officials, local investment promotion and attraction, secondary market, primary market of private equity, judicial sector, etc. and several myths, including interest transfer, stake blackmail, illegal interference and punishment, power-for-money deals, missing of tens of millions of investment. Yet, in this report, we might only be able to the uncover a tip of the iceberg.

Who’s CellOn?

CellOn Communications Technology (Shenzhen) Co., Ltd., a global leading provider of wireless handsets, is dedicated to the development and industrialization of GSM/GPRS, EDGE, WCDMA /EVDO and Wi-Max. In this report, CellOn Communications Technology (Shenzhen) Co., Ltd. is referred to as CellOn, while Jiangxi CellOn is a full-asset subsidiary of CellOn Communications Technology (Shenzhen) Co., Ltd. CellOn provides complete platforms and end-to-end solutions and terminals for tier-1 and tier-2 global mobile operators, tier-1 OEM manufacturers and local king brands in most of the countries with the effort of above 2000 employees in China, Korea, France and the United States. Its clients include both well-known brands such as Motorola, Huawei, Alcatel, Phillip, Xiaomi, TCL, Sharp, and major global mobile carriers, including Sprint, France Telecom, Spain Telecom and Mexico Telecom, etc. Located in the High-Tech Zone of Shenzhen, CellOn’s revenue reached RMB 30 million on average from 2006 to 2009. Since 2009, CellOn had been involved in the smartphone design, R&D, positioning and manufacturing of one third of Motorola smartphones.

In the era of smartphones, CellOn managed to win trust from Lei Jun, founder of Xiaomi Technology. Even when Dai was held behind bars, CellOn won the sales right of Xiaomi in the Southeast market.

Founded in 1999, CellOn is one of the few Chinese enterprises that acquired leading smartphone technologies and one of the biggest smartphone design companies in the world. Even global venture giants such as Sequoia would follow new moves of CellOn in the domestic and global smartphone business.

Dai Xiaoquan, founder and chairman of CellOn, also had a high reputation in the Chinese smartphone industry. With a Pd.D degree from the University of Helsinki, six years of experience in the Findland headquarter of Nokia, Dai was one of the pioneers in the R&D of Huawei’s G1 smartphones. Dai’s achievement in the American market was equal to none in the Chinese tech circle, Yuan Haibao, president of Eternal Asia, once commented. With rich professional knowledge and overseas educational background, Dai dreamed really big and aspired to lead the trend in the rising wave of global mobile ends.

Unwilling to be restricted by design norms and ecosystem limits, Dai aspired to create a closed-loop covering R&D, design and mass-manufacturing, etc., based on which he attempted to make CellOn one of the biggest suppliers and R&D giants in the global smartphone-end sector. However, to achieve this goal, he had to win adequate supports, in terms of both land, capital, production line, labor force, tax policy and favorable policies.

It was exactly at that time that Gongqingcheng City of Jiangxi province approached Dai

Through an investment promotion plan, CellOn entered Gongqingcheng in September, 2010 and invested RMB 300 million to established CellOn’s full-asset subsidiary in Gongqingcheng. For a new county-level city, CellOn is a star enterprise to any degree.

In a short time, Dai transferred its production lines from FOXCONN to Gongqingcheng Economic Development Zone. To ensure steady productivity and control quality, CellOn established its own manufacturing base in Gongqingcheng. Following the steps of CellOn, another 50 smartphone enterprises entered Gongqingcheng. Within a short time, Gongqingcheng’s smartphone industry rose from nothing and the city suddenly became a hot-spot topic in the Chinese smartphone industry.

After Cellon Communications Technology (Gongqingcheng) Co., Ltd (hereafter referred to as Gongqingcheng CellOn) was established, its sales rose significantly. Among its over 5,000 employees, more than 3,000 were local employees. To set up production lines and factories, CellOn purchased a land of 500 acres. Everything went well and it seemed as if Dai could soon achieve his dream: creating a closed-loop covering smartphone R&D, manufacturing, etc.

“Dai is quite well-known in the Chinese smartphone industry. He has certain skills so that his CellOn managed to become one of the leading suppliers in Latin American countries and India,” a veteran angel capital investor told TMTPost.

From October 2010 to June 2013, CellOn contributed to $330 million in foreign exchange earnings and RMB 60 million in taxes and should receive $ 150 million in tax rebates. At that time, CellOn was the biggest tax revenue contributor in Gongqingcheng City (a part of Jiujiang City), the second biggest in Jiujiang City, and the fifth in Jiangxi province. Owing to his huge business contribution. Dai was even once elected as a standing committee member of the Political Consultative Conference of Jiujiang.

In the heyday of CellOn (2013), its production value reached as high as RMB 4 billion. At that time, Dai and his CellOn were undoubtedly apples in the eyes of local government, business circle and ordinary people.

The fierce fight over CellOn's stakes

Nobody would have expected that the apple would disappear overnight.

In June 2013, the leading board of Gongqingcheng city government suddenly changed. After Huang Bin was appointed Member of CPC Jiujiang Standing Committee, Party Secretary of Gongqingcheng City, he reorganized the leading body. In October, 2013, financial institutions in Gongqingcheng suddenly withdrew RMB 500 million debt from CellOn, accusing CellOn of acute drop of new orders

It was since then that the Dominos began to fall, one after another. Within a short time, CellOn fell into a quagmire. As an ODM targeting the overseas market, CellOn was very much capital-intensive. Therefore, a steady cash flow was of vital importance to CellOn. Once financial institutions stopped to lend money to CellOn, everything would stop. As a result, CellOn failed to complete an overseas order worthy of RMB 900 million, while raw materials worthy of RMB 500 million were left unused in the factory.

Prior to the cash flow breakdown, Gongqingcheng lent RMB 1.2 billion to CellOn from 2010 to mid-2013. With a steady cash flow, Gongqingcheng managed to complete rounds of orders and paid back RMB 800 million in total consecutively. However, owing to the cash flow breakdown, CellOn failed to pay back the rest RMB 400 million.

Therefore, Dai could never understand how was it that CellOn was to be blame.

“With enough orders, we could have kept the cash flowing and repay the rest RMB 400 million. It’s the unexpected ‘cash flow breakdown’ that’s to be blame for,” Dai complained to TMTPost, behind the bars.

In December 2013, Zhan Zheng, dean of the School of Finance, Jiangxi University of Finance and Economics, was appointed vice mayor of Gongqingcheng, only two months after he was appointed Advisor on Economic Policies. Soon after Zhan took office, he stopped local banks from lending money to CellOn, accusing CellOn of “owing” money to the “government” before.

According to the official explanation, CellOn got a mortgage of RMB 400 million with 500 acres of land and still owed RMB 400 million to Gongqingcheng, the local financial investment company.

Strictly speaking, however, the financial investment company was not part of the government body. In other words, CellOn didn’t owe any monet to the government, as Zhan claimed.

Nevertheless, after the cash flow was stopped, CellOn’s operation became paralyzed.

What made things even more complicated was that on the evening of October 12th, 2013, a restructuring meeting, presided by Wang Weihua (Director of Finance Bureau of Gongqingcheng) was held at CellOn without Dai and other board members.

The goal of this “wierd” meeting was quite clear:

1. a) Merging all the subsidiaries of CellOn into Cellon Gongqingcheng, making the latter the ultimate center of CellOn;
2. b) Dividing the original management board, building up a new set of management board and giving a representative (to be appointed as vice president of CellOn) from Gongqingcheng government the veto power;
3. c) The incumbent management board shall transfer their stake through stake incentive programs.

It was not until the day after the meeting that Dai Xiaoquan, founder of CellOn, received the decision made at the meeting via email. While no board member attended the restructuring meeting, attendees at the meeting, however, had begun to implement the relevant decisions.

For sure, Dai and other board members were caught off guard.

On Feb 27th, Dai was called back to Gongqingcheng by Huang Bin, the then Party Secretary of Gongqingcheng, for issues concerning CellOn’s restructuring. However, Dai was stopped at the airport by Zhan and directly sent to Gongqingcheng Tea Mountain Hotel. With all the credentials being taken away, Dai was taken into “custody” by the police. For the next two months, Dai was held under 24-hour surveillance every day, for no reason.

It was during the custody that Zhan began to ask for Dai’s stake in CellOn. His offer was: Dai’s stake should be downsized to 34 per cent, the government, represented by him, should account for 33 per cent, while the new board should account for the rest 33 per cent.

According to Dai, when he declined the offer, Dai “flied into a shameful rage and poured a jug of hot water on me”. “He threw harsh words against me and threatened to deprive of my freedom and put me in jail for the rest of my life. He even instigated the contractor to surround my house with knives and rods,” Dai recalled. At last, Dai had no choice but agree to the restructuring and stake transfer plan. Only until then was he allowed to walk away.

Three years later, at the first trial of CellOn over the tax evasion, when Dai’s attorney submitted relevant evidence to prove these illegal behvariors (“detention” and “extortion”), both the judge and the prosecutor didn’t respond anything, or offered any rebuttals.

However, after the cash flow of CellOn’s Gongqingcheng subsidiary was ruptured, a chain reaction was initiated at the Shenzhen headquarter. As CellOn Shenzhen’s business tumbled, local suppliers in Shenzhen filed a lawsuit against CellOn. Henceforth, CellOn’s industry & commerce information was frozen, making it impossible to change the stake structure and legal person. Theatrical as it seemed, Dai’s role as the legal person of CellOn was not changed for a certain period of time. Even so, the local forces in Gongqingcheng didn’t give up.

On Jan 24th, 2017, the People’s Procuratorate of Gongqingcheng brought a lawsuit against CellOn, accusing CellOn and its legal person Dai Xiaoquan of evading RMB 3.39 million in taxes. Two years earlier, Dai was arrested for “tax evasion” and later let go due to the lack of evidence. Nevertheless, he was held under surveillance for a while.

However, is CellOn really guilty of evading taxes? On April 26th, 2017, Dai’s attorney, the prosecutors and Gongqingcheng Court held a pre-trial meeting. At the three-hour meeting, three parties had a fierce debate around the following three issues:

1. Did Gongqingcheng really evade RMB 3.39 million in taxes?

According to the Procuratorate of Gongqingcheng, CellOn Gongqingcheng didn’t pay RMB 3.39 million in property tax, land use tax and stamp tax from 2010 to 2013. Therefore, Dai Xiaoquan, as the legal person of CellOn, had to shoulder the responsibility.

However, we learned that according to the “investment agreement” between CellOn and Gongqingcheng, CellOn should have received RMB 46 million in total from the Gongqingcheng government as incentives (including foreign currency contribution reimbursement and tax rebate reimbursement) by 2014. However, it was not until January 23rd 2017 that the Gongqingcheng government paid up all the reimbursement. Yet, it was clearly stated in the reimbursement receipt that CellOn Gongqingcheng paid RMB 191 million in taxes in total from 2010 to 2016, and that Gongqingcheng government should give CellOn a tax rebate of RMB 36.65 million.

Besides that, it was stated clearly in the receipt that RMB 20.575 million was deducted to pay back CellOn’s tax, overdue fine and penalty fine. In other words, when the local government paid back CellOn the reimbursement, it had already deducted the RMB 3.39 million CellOn was said to owe to the local government. At the same time, the rest RMB 25 million the local government should have paid to CellOn Gongqingcheng, however, remained unpaid.

When Dai’s attorney submitted relevant materials to the Procuratorate and the judge, he was simply ignored.

By the way, it is stipulated in the Criminal Law that an enterprise is guilty of tax evasion only when it evaded over 10 per cent of its tax.

On the court verdict of the first trial, the Procuratorate and the court agreed that CellOn was guilty of tax evasion because it paid RMB 7.7 million in taxes in 2013 but evaded RMB 930,000, accounting for 12.11 per cent (higher than 10 per cent) of the tax it was supposed to pay.

However, in our research, we found that CellOn Gongqingcheng paid RMB 7.63 million in taxes simply at the Shenzhen Customs. That’s to say, the local court didn’t include this part in its calculation. While the local court identified that CellOn should pay RMB 7.7 million in taxes and evaded RMB 930,000, it actually paid RMB 7.63 million more and RMB 15.33 million in total. In this case, if CellOn did evade RMB 930,000, it only account for 6 per cent of the tax it was supposed to pay. In other words, CellOn was not guilty.

2. Where’s the promised tax refund, exactly?

For a long period of time, the State Administration of Taxation has been implementing the tax rebate policy to encourage private companies to earn foreign exchanges. According to relevant policies, CellOn Gongqingcheng should have received a total tax rebate of RMB 120 million due to its huge contribution in earning foreign exchange. Since the Bureau of Taxation of Gongqingcheng failed to return the tax rebate to CellOn Gongqingcheng, the latter even suffered from a shortage of cash flow for a while. When CellOn Gongqingcheng repetitively asked for the tax rebate, the Bureau of Taxation’s response was: since the bureau had certain goals to meet, it would temporarily keep the tax rebate at the bureau and shall be used as future taxes of CellOn Gongqingcheng.

The Bureau of Taxation of Gongqingcheng even came up with a term to describe such this “procedure”: relocation of tax rebate.

“Such procedure is certainly illegal,” Zhu Pengzu, Director of China Taxation Law Research Institute, told TMTPost. According to him, taxes should be allocated to certain pools accordingly. Therefore, the Bureau of Taxation bears the responsibility to make ensure every tax is sorted orderly, and no money was put in the wrong pool. In fact, this is something the Bureau of Auditing should attach special emphasis on in its auditing.

“Strictly speaking, the Bureau of Taxation doesn’t have the right to relocate tax rebate,” Professor Zhu added. In the provincial and city level, the Bureau of Taxation’s only role is tax-collector.

After all, tax rebate comes directly from the National Treasury and has nothing to do with the local treasury. After an enterprise followed certain application procedures, it would receive tax rebate by the next year. Although there might be certain delay in this process, it won’t take over three months. “I’ve never see cases like this before, since it took years before the tax rebate was finally transferred to CellOn,” Professor Zhu said.

Based on Professor Zhu’s analysis, the Bureau of Finance also played a role in this case, since the Burea of Taxation couldn’t relocate tax rebate from the National Treasury alone. In fact, the Bureau of Finance had to go through rounds of procedures to “relocate” the RMB 120 million from the National Treasury to the local treasury.

In normal situations, the National Treasury has to go through a certain procedure, compare the relevant information in both the local taxation system and finance system, so as to make sure the tax rebate has been transferred to the enterprise. However, this procedure seemed to be missing in CellOn’s case.

However, since the local Bureau of Taxation couldn’t directly “relocate” the tax rebate back to its own account, Professor Zhu predicted that the bureau might have created a virtual enterprise account and transferred the tax rebate to this account. Next, this virtual enterprise could go through an advance tax payment procedure and return the tax rebate from the virtual account to the local bureau of taxation. It was after such “maneuver” that the tax rebate was left in the local bureau of taxation and became part of the taxes it collected. After the local bureau of taxation divided half of the “maneuvered” taxes to the National Treasury, it could grab the other half of the RMB 120 million tax rebate.

The tax rebate to CellOn was turned into “advance tax payment” after the “tax rebate relocation procedure”

However, Gongqingcheng Court again didn’t admit the evidence. From the aspect of Professor Zhu, it’s unreasonable Gongqingcheng Court didn’t admit the evidence about the illegal “tax rebate relocation” procedure. Without looking into the evidence, the local court simply provided the official definition of “relocation of tax rebate” to fudge the controversy.

“If these invoices meant nothing, then why did the local bureau of taxation bother to issue them to enterprises,” Professor Zhu refuted/

3. Does CellOn count as an “export enterprise”?

On May 18th, 2017, the first trial of CellOn Gongqingcheng opened. Before the trial, Chief Judge Zhou approached both Dai and his attorneys advised that they said nothing about the illegal custody and extortion of stakes during the trial. However, when Dai and his attorney explained how things got into this point, submitted relevant papers and documents about tax rebate and reimbursement to prove their innocence, the Prosecurator refuted back, arguing that “CellOn was not an export enterprise”.

“We were astonished by such argument,” Xie Min, one of Dai’s attorneys, recalled, “CellOn is known as an export company. Besides, we just submitted relevant papers about tax rebate and reimbursement. On what base could the Prosecurator come up with such argument?”

“Where’s the RMB 120 million tax rebate, exactly?” Xie directly asked the question at the court, “The tax rebate should have been passed on by the local Bureau of Finance to CellOn Gongqingcheng, but CellOn had never received any tax rebate. How come?”

Based on the materials mentioned above, Xie deduced that the tax rebate might have been kept at the local Bureau of Taxation after deducting the advance taxation payment.

“If the Prosecurator doesn’t admit that the so-called tax-evasion has already been deducted from the tax rebate, then where’s the tax rebate, then?” Xie questioned the Prosecurator closely at the trial.

However, the Prosecurator didn’t admit any of it, even being presented all these evidence.

When Dai’s attorney tried to submit the original customs clearance invoice and tax invoice, the court again refused to admit the new evidence.

Five failed attempts of restructuring CellOn

Attempt One: Taiwan Xinyi

To fix the cash flow and debt crisis, Dai approached Taiwan ACARD and negotiated over the possible restructuring. After ACARD got involved in the operation of CellOn, Zhan Zheng, vice mayor of Gongqingcheng, had a fierce conflict with Liu Zhisheng, chairman of Taiwan ACARD, over the management right of CellOn.

On September 12th, 2014, to maintain its control of CellOn Gongqingcheng, the Gongqingcheng government established “CellOn Operation & Management Committee” under the leadership of Huang Bin, the then Party Secretary of Gongqingcheng. Led by Zhan Zheng, the then vice mayor of Gongqingcheng, the committee became the highest decision-making body of CellOn Gongqingcheng. In a letter of accusation to Jiangxi Provincial Disciplinary Inspection Commission, Dai wrote: “Party Secretary Huang Bin threatened at the foundation ceremony of the committee that if didn’t cooperate, I shall be put in prison. Besides being forced to be cooperative, I was also asked to share and divide my own stakes. Huang demanded that nobody could leave the conference without signing the paper. Although we persisted and tried to stick to our position, all of us ended up being forced to sign the memorandum at 04:00 AM the next morning,” Dai recalled.

The memorandum Dai and other board members were forced to sign, according to which the local government, represented by Zhan Zheng, would take full control of CellOn and Dai Xiaoquan, the “chairman” of CellOn, was deprived of the leadership.

Before the memorandum was signed, Dai had 71 per cent stake in CellOn Gongqingcehng. According to the memorandum, however, Dai was deprived of its leadership, stake and stock appreciation right, while the local government gained full control of the company without investing in anything. All that was left for Dai Xiaoquan, once the biggest shareholder, chairman and founder of CellOn, was voting right, while Zhan Zheng had both the veto right and the approve right. Zhan and Huang had the right to interfere with the everyday business of CellOn, but didn’t have to bear any responsibility for their decisions. All of a sudden, official seals of all the subsidiaries of CellOn, including the Shenzhen headquarter, the Chengdu subsidiary, the Gongqingcheng subsidiary, were controlled by the Qongqingcheng government.

In this process, no board meeting or general meeting of shareholders were held. In fact, all the major board members of CellOn were never informed of the decisions made at the conference. However, according to the Company Law of China, the government can interfere with the operation and management of private enterprises on the condition that the government has invested in the company and that the business & industry certificate has been adjusted accordingly. Yet, when Gongqingcheng government forced CellOn’s board members to sign the memorandum, it publicly grabbed the operation and control right of Dai Xiaoquan over CellOn, who had actually invested RMB 300 million in CellOn.

The local government should have simply acted as the guiding body of CelOn, but ended up becoming a major decision-maker in the everyday management and operation of CellOn’s subsidiaries. Faced with so much restriction, Taiwan ACARD gave up on the restructuring soon as a result.

“Indeed, I didn’t think it clear the first. It was Zhu Jinghai, the then operation manager, who led to the cooperation. Later, I did receive multiple letters accusing Zhu of having a secret agreement with local officials from Gongqingcheng and made a fortune as the ‘match-maker’,” Dai recalled, regretfully.

Attempt Two: A major internet company

To save CellOn, Dai even seized the opportunity after he was released and turned to other parties looking for restructuring, including a major Chinese internet company, for help.

The founder of the internet company asked Dai if he had any problem with the capital chain and had a thorough discussion over the possibility to develop CellOn’s own smartphone brand. In November 2013, the internet company reached an agreement with Dai after rounds of negotiation: CellOn and the internet company would co-found a joint venture, with CellOn accounting for 51 per cent stake based on its technology and R&D team, and the internet company taking the rest 49 per cent based on its capital and internet marketing resources. Based on the potent R&D team at CellOn and the strong capital flow and internet resources of the internet company, they set out to develop and release a smartphone brand of their own.

“This could be a huge turning point for us. All the executives and employees at CellOn were excited about the agreement and we were so close to signing the deal,” Dai recalled.

However, before Dai set out to Beijing to sign the contract, he received multiple calls from Wang Weihua and Zou Xiufeng, asking him not to sign the deal. They warned Dai that if he signed the deal, they would take compulsory measures. Under their pressure, Dai had no choice but to give up the attempt.

Feeling cheated, the internet company stopped the cooperation with CellOn. However, as far as we learned, the internet company had no clue why Dai broke his promise.

Nevertheless, this could have been the new starting point for CellOn.

Attempt Three: Inner Mongolia Development

After the above “farce”, Dai had no choice but to accept the restructuring assignment by Zhan Zheng. Following, Zhan invited Zhou Minglei to enter the “feast of capital”. Known as a mysterious PE capital player, Zhou evoked lots of controversies in the secondary market. In a report (titled “The Myth behind Zhou Minglei’s ‘Restructuring Magic Show’”) from EEO on June 24th 2013, it was said that any public company that had anything to do with Zhou in its restructuring would suffer from rounds of investigation from CSRC and suspension from the stock exchanges. However, Zhou managed to stay clear of the blast, anyhow.

Zhou’s customary tactics was: first, looking for public companies with poor business performance; second, turning it into shell company and grabbing control over the public company gradually; third, inserting hot-spot concepts and assets in the shell company; fourth, driving up the stock price through merger and making profits from the equity premium and the consulting fee. This logic applied both in ST Jiantong and ST Guoyao, but also Tibet Development and Zhenghe.

Led by Zhan Zheng and Zhou Minglei, Inner Mongolia Development began to consider the possibility to merge CellOn.

After basic duty research and third-party auditing, CellOn’s intellectual property was valued at RMB 280 million, while its orders and fixed asset were valued at RMB 1.2 billion. In a short time, the two parties entered into the negotiation process of the potential merger.

At this point, Zhan again intervened and asked for stake in the restructured company. Zhao Wei, the then head of Inner Mongolia Development, disagreed. His reason was quite rational: it’s impossible to give a government official or a government unit stakes in the restructured company when they had no investment in the company from the very beginning.

After Dai relayed Zhao’s disagreement to Zhan, Huang Bin, the then Party Secretary of Gongqingcheng, had a meeting with Zhao Wei and Dai Xiaoquan at Gongqingcheng Grand Skyland Hotel. During the meeting, Dai and Zhao told Huang clearly that Zhan’s requirement was at odds with relevant rules over public companies and such illegal operation would be cracked down by the CSRC. However, Huang made it clear that without Zhan in the game, the deal couldn’t be closed. No matter what it took, Zhan had to hold stakes in the restructured company. Driven by the deadlock, Zhao had no choice but come up with an alternative solution: Zhan had to find a company with proper asset, so that Inner Mongolia could acquire the company together with CellOn. Huang agreed on the solution. However, by the closing day of the restructuring, Zhan still failed to find an appropriate company. As a result, the plan didn’t work out either.

Based on the email between Li Yong, the then vice chairman of Inner Mongolia Development and Zhan Zheng’s assistant in January 2015, Zhan once warned Li that if Zhan was taken out of the game, he could arrest Dai again, thus nullifying the deal.

On January 7th, 2015, when Dai reported the illegal behavior and the inappropriate requirement from Zhan Zheng, the then vice mayor, to Lu Baoyun, Lu’s response was: “Zhan was a talent and a huge supporter of Gongqingcheng’s development.” Therefore, the report paled into insignificance.

A week later, when Inner Mongolia issued the Indication of Interest to Acquire Gongqingcheng CellOn, Zhan was excluded from the deal. Two days later, Dai was bundled into a car by several policemen from Gongqingcheng in Shenzhen for “executive-level tax evasion”.

However, based on the agreement between CellOn and Gongqingcheng government, CellOn’s executives were free from any individual income tax for the first two years. In other words, this arrest was groundless.

Strangely, the arrest didn’t enter into the legal prosecution process. Dai was not put in a cell, but rather held under surveillance later. Since the founder of the merged company was detained within three days the Indication of Interest was released, Inner Mongolia’s restructuring endeavor was stopped. Since then, Dai’s surveillance was never loosened.

Since the restructuring endeavor of Inner Mongolia Development was interrupted, Zhan Zheng appeared on stage and the Gongqingcheng government began to take over the operation and restructuring of Gongqingcheng CellOn.

Interlude: The Fight over the Control of CellOn

In May 2015, Gongqingcheng government issued the Implementation Procedures of CellOn’s Restructuring, announcing that an operation committee led by the government would take over the seal of the legal person, and that CellOn’s legal consultant was fired. Based on the Cooperation Agreement, an asset worth RMB 280 million from CellOn Shenzhen was handed to Gongqingcheng Jinqin Co., Ltd., a company backed by officials from the Gongqingcheng government.

On July 3rd 2015, Zhou Minglei sent an agreement on assignment of equity interests to Dai and asked Dai to sign and seal the deal when he was under surveillance and couldn’t change anything in the agreement.

Based on this agreement, Beijing Furong Yongtai Capital Management Co., Ltd (hereafter referred to as “FRYT”) would bear the RMB 300 million debt of Gongqingcheng CellOn, and take over CellOn’s stake through debt-to-equity swap mechanism. Based on the public information from the Bureau of Industry and Commerce, FRYT was founded in June 2010 in Haidian District, Beijing, with a founding asset of RMB 20 million. However, after the agreement was signed, FRYT never bore or paid off any debt mentioned in the agreement.

Based on the phone call recording between Dai and Liu Chun (Zhou Minglei’s partner), Liu explained that 50 per cent stake of FRYT was meant for Zhan. Without the previously attributed asset, Liu got quite annoyed after the asset assignment. He also mentioned in the phone call that Zhan once told them that now that Dai had signed the deal, he had nothing left and everybody else were free to divide his assets.

Based on another phone call recording, Wang Kun, the former attorney of Zhou Minglei, once said that FRYT was not Zhou Minglei’s company, but rather the company of Zhou’s creditor. Zhou owed RMB 200 million to the creditor, so he transferred the other half stake in Gongqingcheng CellOn to FRYT as security.

Attempt Four: Tongzhou Electronics

To further divide CellOn’s asset, Zhou found Yuan Ming, chairman of Shenzhen Tongzhou Electronics Co., Ltd. Following, CellOn and Tongzhou reached an agreement and co-invested in a new company called Lielong Technology Co., Ltd.

While Tongzhou Electronics, the local government and other investors Zhou managed to find invested RMB 880 million, the government accounted for 54 per cent stake in the new company. While Tongzhou’s RMB 150 million investment was transferred by December 2016, Zhou and his controlling investors were supposed to invest RMB 100 million, 100 millon and 50 million, respectively. However, their investment and the investment from the local government were never transferred to Lielong’s account. Based on the agreement, Lielong would purchase relevant manufacturing asset from CellOn with RMB 400 million and carry out hardware manufacturing and operation based on CellOn’s rich experience, the company would be used to pay off the debt of Gongqingcheng Financial Management Investment Co., Ltd.

However, the RMB 400 million was again illegally transferred. After much endeavor, we managed to find the proof for the illegal asset transfer.

An investment agreement at odds with the original agreement, involving RMB 150 million in cash, RMB 280 million in intellectual property, was immediately implemented without the approval of the general meeting of stockholders, without any seal and the specific signing time.

Liu Hui (or Liu Banghui) was an employer of Zhou Minglei’s company, the legal person of Gongqingcheng Lielong Technological Development Co., Ltd and Beijing Soft Finance Technological Investment Co., Ltd. The subsidiary companies also include: Beijing Shixin Hengyuan Culure Media Co., Ltd and Beijing Huizhi Rongsheng Information & Technology Co., Ltd.

Based on the above agreement, it was Liu Hui who transferred the RMB 150 million Tongzhou invested in Lielong to Soft Finance’s account. Besides, he also transferred RMB 195 million in total into Soft Finance’s account later. In other words, Liu Hui was transferring assets into his other companies through Lielong.

Based on Lielong’s account transaction, two bills were transferred to Soft Finance consecutively. On December 30th 2015, RMB 50 million was transferred to Soft Finance; on January 4th, another RMB 100 million was transferred to Soft Finance.

This picture showed that RMB 195 million in total was transferred from Lielong to Soft Finance, while another RMB 15 million was transferred to Beijing Shixin Hengyuan, also a subsidiary company of Liu Hui.

Based on the public information from the Bureau of Industry and Commerce, Beijing Soft Finance Technological Investment Co., Ltd was founded on October 15th 2015 with a registered asset of RMB 150 million. Surprisingly, one of its two institutional shareholders include Shenzhen CellOn, which invested RMB 50 million. However, at tha time, Dai was detained, while all the official seals of CellOn were confiscated by the Burea of Finance of the Gongqingcheng government. In other words, it was the Gongqingcheng government that was in charge of the business investment and operation of CellOn at that time. Therefore, it was the officials from the Gongqingcheng government who decided to change the registration information of Beijing Soft Finance at the Bureau of Industry & Commerce.

In common practice, the RMB 150 million Tongzhou invested in Lielong and RMB 250 million other investors invested in should be transferred only it was agreed by Lielong’s board of directors. However, based on the relevant document, only two representative board members from the Gongqingcheng government signed the transfer.

Another institutional shareholder of Beijing Soft Finance was Beijing Huizhi Rongsheng Information & Technology Co., Ltd. Based on the public information from the Bureau of Industry and Commerce, the investor of this company was Rui’an Bateng Capital Management Co., Ltd, a company owned by Zhou Minglei and Zhou Mingjuan. As a matter of fact, the name Zhou Mingjuan appeared several times on the executive board of companies involved with the transfer from Lielong. It is said that Zhou Mingjuan was actually the sister of Zhou Minglei, but we are still not quite sure yet.

In a word, both Zhan Zheng and Zhou Mingle were involved in this illegal asset transfer.

To cover the loss, Yuan Ming, chairman of Tongzhou Electronics used his own money to fill the gap. Based on the phone call between Yuan Ming and Dai Xiaoquan’s attorney, although Yuan Ming filed for lawsuit against Lielong for illegal transfer of huge asset in May 2016, the police never carried out any investigation.

It was not until Zhou Minglei, the actual owner of Beijing Liexiang, was detained for huge sum fraud by the Changsha police on May 8th that Gongqingcheng government began to attach high importance to the case and initiate relevant legal procedures to chase over the missing investment.

Although Zhou Minglei had admitted his fraudulent behavior at Gongqingcheng, Lu Baoyun, head of CellOn’s restructuring leader group, never did anything in response as to the RMB 150 million illegally transferred by Zhan Zheng.

Attempt Five: Sichuan Development

On May 18th, after the first trial was over, Dai was ready to leave Gongqingcheng and get back to Shenzhen. Chen Wei, director of the Bureau of Finance and Tax, on behalf of the mayor, again found Dai and discussed over the restructuring. The government’s offer was again to let Dai cooperate with Zhou Minglei, who was already detained for huge sum fraud of RMB 150 million. Dai learned the lesson and denied the offer.

In July 2016, approved by the State Council, Gongqingcheng was put into part of Jiangxi Ganjiang New District. Following, lots of new deals and industrial projects came to Gongqingcheng, bringing new opportunities to Jiangxi’s regional economy. For sure, the rise of Gongqingcheng CellOn, once the start company of Gongqingcheng, would be a boon for both Gongqingcheng and Ganjiang New District. Especially, some new leaders in the Gongqingcheng government began to ponder on the possibility to stimulate the local economy.

Convinced that it’s safe to look for another restructuring, Dai turned to Sichuan Development, the biggest state-owned investment group in Sichuan province, for help. On July 5th 2017, Zhang Zhijian, vice mayor of Gongqingcheng, was sent to Shenzhen and attend a meeting with Dai Xiaoquan and two other representatives from Sichuan Development. At the meeting, Dai was still passionate and full of hope in his presentation, though still suffering from years of struggles, interference and misfortunes.

Sichuan Development carried out duty research and made sure the pre-condition of its investment & restructuring was: Gongqingcheng CellOn and Dai Xiaoquan himself have to be legally innocent. However, just as the restructuring was on the way, Dai was again detained by the Gongqincheng police on July 17th 2017.

Three days later came the beginning of this report. At 11:00 AM, July 20tgh 2017, Xie Min met Zhang Zhijian, a key participant in CellOn’s latest restructuring, and said that Dai’s arrest at this time meant this restructuring attempt had again failed. Zhang confirmed at the scene that he would report to relevant leaders immdediately.

However, at 3:00 PM, two judges appeared at the prison and announced their sentence: two-year imprisonment.

Dai, the tragic hero

From February to April 2014, Dai was illegally detained for the first time. He was released only when he was forced to sign the stake transfer agreement in April. In January 2015, Dai was again detained for “individual tax evasion”, but held under surveillance the next day. Since then, although the prosecutor didn’t have any concrete proof, Dai never gained his freedom. In May 2017, Dai was again prosecuted for “tax evasion”. Two months later, Dai was sentenced to two-year imprisonment in haste. Today, Dai was still held at the Detention Center of De’an County, Jiujiang City, Jiangxi Province.

“As an intellectual, Dai Xiaoquan was too naïve in the face of the government,” Li Zhujie, a renowned investor and co-founder of Shenzhen CellOn, sighed. If he had known clearly the “norms” in conducting business together with the local government, he wouldn’t have ended up behind the bars.

From the aspect of Dai’s investor, Dai was too intellectual to be afraid to speak out his trouble. Although he suffered from so much unfair treatment, he was still trying his best to save the company by himself, and never warned his investor of any risks. “He just doesn’t want to bother other people,” Dai’s investor said.

However, this might be something quite common among technological talents who’ve spent a long period of time working overseas. “Dai was someone you would most easily ignore at the tables,” an investor of CellOn recalled. For most people, Dai was direct and able, kind and stubborn, simple or even boring, keen in the business and enthusiastic in products and technology. However, it seemed that his personality didn’t quite suit in the Chinese business environment.

In the eyes of Dai’s friends, he was absolutely a workaholic.

“His only hobby in life was to win new orders. He didn’t have any interest in luxury cars, houses or other luxurious hobbies,” Dai’s classmate recalled. Once, he told his classmate he could only find some space for himself when he was sitting at the cafeteria at airports. Buried in rounds of negotiation, Dai often found himself travelling from airports to airports, from countries to countries. Seldom does he have time to get together with his family or have some space for himself.

Another time, when Duan Weixi asked if Dai could send him to the railway station, he was surprised to find that Dai never knew how to go to the railway station. Although Dai was always on the way to or from railways and airports, he seldom had the time to look outside. Instead, he would make use of any free time to work with his laptop.

When Dai was held under surveillance and forced to sell his stake at a lower price, he wrote a letter of accusation to the Commission for Discipline Inspection of Jiangxi Province.

In February 2015, the Commission for Discipline Inspection of Jiangxi Province asked the local commission of Jiujiang to send two representatives to Gongqingcheng Tea Mountain Hotel to find out what happened. However, the investigation ended up nothing.

Today, Dai had nothing left. His company was gone, and his only property was also auctioned.

“The only thing that still worried me is that my wife didn’t have a job. How could she afford the live and take care of our two kids?” Dai burst into tears with a letter from his wife in hands.

Not satisfied with the verdict of the first trial, Dai had already decided to appeal against the verdict. Shortly, the second trial will be held at the Middle People’s Court of Jiujiang, Jiangxi Province.

Note:

At the beginning of 2017, the Commission for Discipline Inspection of Jiangxi Province issued an announcement: Huang Bin, former member of the standing committe of Jiujiang, former party secretary of Gongqingcheng, was expelled from the party and discharged from public employment.

Through investigation, it is found that Huang Bin broke the political disciplines of the party, detested the investigation from the party, promote cadres inappropriately, accepted bribes and gifts during his term of office at Xiushui County, Gongqingcheng City and Jiujiang City and didn’t stop even after the 18th Party Congress.

Zhan Zheng, former vice mayor of Gongqingcheng, has been transferred back to Jiangxi University of Finance and Economics after his term was ended.

All the other people mentioned in this report were incumbent and attributed with the real name.

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Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.