Trinity research just released its second report alleging fraud at 21Vianet Group Inc (NASDAQ:VNET). The new report follows a 121 page report released last week, which the company recently responded to. The new report alleges that a range of insiders are engaging in undisclosed related party transactions with VNET and are secretly engaging in businesses which actually compete with VNET.
21Vianet Group’s Undisclosed Insider Activities: Executive Summary
- 21Vianet Group Inc (NASDAQ:VNET) co-founders Chen Sheng and Zhang Jun (CEO and former COO) directly and indirectly control numerous related parties that have not been disclosed to the SEC. We count 16 such companies in the SAIC database.
- Eight (8) members of VNET’s executive team and one (1) former employee are legal representatives, directors, managers or supervisors of these companies. None of these relationships have been disclosed to the SEC.
- Some of these companies have engaged in undisclosed transactions with VNET or VNET’s disclosed related parties.
- VNET co-founders indirectly control and therefore personally benefit from a related party that competes with VNET. This violates the non-compete clause of any standard employment contract enforced as a governance best practice.
- All these insider activities put into question the credibility of 21Vianet Group Inc (NASDAQ:VNET)’s management and its board of directors, who we believe are not upholding their fiduciary duties.
- We urge the SEC and E&Y, 21Vianet Group Inc (NASDAQ:VNET)’s independent auditor, to investigate these activities immediately.
The SEC’s Related Party Disclosure Requirements
The SEC requires disclosure of related parties and related party transactions for all companies listed on a US stock exchange such as 21 Vianet Group (“VNET”). The SEC defines a related party as follows.
Financial Accounting Standards Board Statement No. 57, Related Party Disclosures, paragraphs 2 through 4 [AC section R36.102-.104], contains the disclosure requirements for related party relationships and transactions. The glossary of that Statement [AC section R36.406] defines related parties as follows:
Affiliates of the enterprise; entities for which investments are accounted for by the equity method by the enterprise; trusts for the benefit of employees, such as pension and profitsharing trusts that are managed by or under the trusteeship of management; principal owners of the enterprise; its management; members of the immediate families of principal owners of the enterprise and its management; and other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
21Vianet Group’s Undisclosed Related Parties
21Vianet Group Inc (NASDAQ:VNET)’s latest 20-F, for fiscal year 2013, makes various related party disclosures on page F-63.
We call to your attention the five related companies highlighted in Exhibit 1, all of which were sold to allegedly unrelated “third parties”:
- 21 Vianet Beijing Intelligence Energy System Technology (“21V BJ”)
- Ningbo 21Vianet Information Technology Co., Ltd (“21V NB”)
- 21Vianet Intelligence Technology Co., Ltd (“21V FS”)
- Tianjin Yunlifang Technology Co., Ltd. (“Tianjin Yunlifang”)
- 21Vianet Group Inc (NASDAQ:VNET) Engineering Technology Services Co., Ltd (“VEE”)
Footnote 1 of the 20-F states these five companies are to be considered unrelated after their sale. Since we found inconsistencies between SAIC and SEC filings for VNET in our first report2, we were naturally suspicious and investigated these companies’ SAIC registrations. We also ran a search on the SAIC database for all companies either directly or indirectly controlled or otherwise affiliated with VNET or a VNET insider.
See full Undisclosed Insider Activities at 21Vianet Group Inc (VNET) in PDF format here.