The Taishun County government and police security bureau are accused of promoting the Liren Education Group's fundraising activities despite knowing the company was hugely in debt.
More than 7,000 individuals lent 4.5 billion yuan to the company between 1998 and 2011, China Business News reported yesterday.
ccording to the lawsuit, this explained why the local government turned a blind eye to Liren's fundraising activities. It also alleged that, faced with Liren's alarming debt, top officials went on local television to encourage people to help the group.
More than 80 percent of the households in Taishun County became entangled in the fundraising fraud while other victims came from the neighboring Jiangsu and Fujian provinces and north China's Inner Mongolia Autonomous Region.
China's lending scam victims seek state compensation
The county government and police turned a blind eye to Liren's lending scam, especially allowing the company to gather nearly 900 million yuan from private creditors on the false promise of high returns in the final four months before bankruptcy, according to the litigation, adding that some officials even participated in the scam themselves.
When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors, they added.
Liren's downfall again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy.
Last year, a survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors because small companies have difficulties securing loans from banks.