Scandal in China Felt on Wall Street
The scandal of indicted Xinhua Finance founder Loretta Fredy Bush burned some of the sharpest minds on Wall Street, including one of the richest self-made women in the U.S. Last week, Ms. Bush was indicted by a U.S. grand jury on charges that she and two Xinhua directors committed conspiracy, mail fraud, and made false statements, enriching themselves by $50 million. It was the latest incident to highlight the sometimes opaque finances of publicly traded Chinese companies. Among those affected by the scandal was Lynn Tilton, the flamboyant chief of private-equity firm Patriarch Partners. Ms. Tilton, through her solely owned company, started taking a personal stake worth tens of millions of dollars in Xinhua Finance in 2004. She said she never sold a single share. Patriarch also extended more than $50 million in loans to a Xinhua subsidiary that trades in the U.S., much of which it hasn’t been paid back, she said.
Now, after the subsidiary defaulted on those loans and its shares dropped 99% from their peak, Ms. Tilton is trying to recoup the loans and reduce the losses from what turned out to be a costly friendship, she said. The two bonded over their similar backgrounds and co-owned a house in Hawaii. “I see now that this was never really a friendship,” Ms. Tilton said Friday. “I was deeply betrayed by the trust I put into this personal and professional relationship.”
Ms. Tilton’s experience suggests even the “smart money” can be taken in amid the lure of China’s huge, rapidly growing market. And she isn’t alone. Larry Kramer, founder of the MarketWatch financial-news service, served two years as a director of that subsidiary, brought on board by Xinhua at a time when its corporate governance faced heavy criticism in 2007. MarketWatch is now owned by News Corp., which owns The Wall Street Journal. Mr. Kramer said he doesn’t feel burned and that he liked Ms. Bush. He said he had no inkling of any wrongdoing when he was on the board, and noted that the allegations against Ms. Bush deal with the parent company, not the U.S. subsidiary on whose board he served. Ms. Bush once headed the subsidiary and its former chief financial officer was one of the directors indicted with her.