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Below-Belt Blows in Kungfu Restaurant Battle

The crestfallen former chairman of fast-food restaurant giant Kungfu Catering Management Co. Ltd. is awaiting a verdict after a trial on corporate embezzlement charges apparently instigated by his former business partner’s wife.

If Cai Dabiao is found guilty in Guangzhou’s Tianhe District Court, where his trial August 31 and September 30 followed more than 500 days of police detention, he’ll be stripped of stakes in a successful company he co-founded with Pan Yuhai in 2004.

Neither will several relatives get another chance to sit as executives for the Kungfu chain of more than 400 restaurants across China.

Mr. Cai Dabiao, chairman and founder of Kungfu Catering Management Co. Ltd.
Also awaiting verdicts after standing trial with Cai in Guangzhou are his younger brother Cai Liangbiao, assistant Ding Weiqin, brother-in-law Li Yueyi, and former company vice president Hong Rengang.

Cai, his brother, and Li served on the company’s board of directors before they were detained in March 2011. Ding was Cai’s personal secretary.

Cai’s career and his family’s future started crumbling in August 2010 when Guangzhou police got a report about their alleged wrongdoing from Dou Xiaolei, Pan’s wife. Her allegations capped a four-year effort by Pan to win full control of the company, said one of Cai’s family member who was sitting in the observer’s area during the trial.

Dou filed the complaint with the Guangzhou Public Security Bureau’s Economic Crime Investigation Squad. She claimed Kungfu officers including Cai embezzled 59.6 million yuan from a company bank account.

At first, investigators balked at the charges and chose not to pursue a case. But they reconsidered the following December after Dou filed a second report claiming “new clues about crimes committed by Cai and others.”

According to Dou’s fresh information, Cai and his cohorts stole more than 13 million yuan from the company. She cited “oral reports from some company employees” as the basis for her charges. This time, according to a note signed by the head of the crime investigation squad, investigators found Dou’s evidence credible. They launched an official probe in January, and two months later the suspects, including Cai, were detained for alleged economic crimes.

Five days after Cai was taken away, police seized Kungfu Catering’s corporate seals, account books, and trade licenses from his office. A short time later, said Cai’s relative, they handed over the company’s core business documents to Pan.

Pan has served as the company’s acting chairman ever since.

Questionable Confessions

In court, lawyers for Cai and the other defendants denied all charges. They also faulted Guangzhou police for intervening in what they called a basic, civil law financial dispute—a wrestling match between Cai and Pan for control of Kungfu.

On the hearings’ sidelines, some of Cai’s relatives said that before Guangzhou police began the probe, Pan had befriended officers serving on the economic crimes investigation unit in hopes of winning their backing for his effort to oust Cai.

Police allegedly went too far. Some defendants testified that they had been mistreated or even tortured with sleep deprivation during police interrogations. Some claimed transcripts from their interviews with police were later altered, while others said the questioners had forced them to make false confessions. Ding said she was not allowed to rest for a questioning session that lasted fifty-seven hours. Her lawyer in court also raised allegations of illegal investigation procedures by police, but prosecutors cut him off.

“The defense lawyer’s responsibility is to defend the accused, not attack public security authorities,” said one prosecutor.

Cai’s brother questioned the legitimacy of two confessions submitted by the trial’s four-member prosecution team. He told the court he had been promised bail if he wrote in a confession that he had committed crimes while following Cai’s orders.

A defense lawyer noted police interviewed the brother five times but submitted records to the court from only two sessions. And records were not submitted for six out of ten interrogation sessions with Cai.

Prosecutors, meanwhile, said they had obtained transcripts from seven of the ten police interviews with Li, adding police acknowledged conducting several informal meetings with the ex-company official in hopes of winning his cooperation.

Before Li’s detention, said the prosecutor, Guangzhou police officers dropped by Li’s home to wish him a happy Chinese New Year. But Li said he “couldn’t tell the difference between informal meetings and interrogations.”

Li told the court that police did not record his initial interview with authorities but was told to write a letter to Cai asking him to cave in to all of Pan’s business demands. In exchange, Li said he remembers, police promised him bail.

Li also showed the court a secretly made personal record of an interrogation session, which he said proved his words had been distorted in police records.

After refusing to write the letter to Cai, Li testified, a police officer warned about “putting your family at risk, especially your wife. We suspect she helped Cai abscond to avoid punishment and could spend one or two years behind bars. Or we could at least detain her for thirty-seven days.”

Pan’s role in the police action has been stressed by Cai as well, but with limited effect.

Cai tried to testify that investigation team leader Li Chao asked him repeatedly from the first day of his detention to surrender all his shares in Kungfu to Pan. During some of these interviews, he said, Li paused to speak with Pan on the phone about his plans to join the company. Cai’s lawyer argued the prosecutor had submitted no concrete evidence to back claims that Cai had wound up with money he allegedly embezzled.

Cai admitted transferring 8 million yuan to another company to pay off a loan, which he called a common business practice. “Pan also borrowed a lot of money from the same company,” he said.

The court listened to some of Cai’s defense arguments, but refused to allow his testimony about Li Chao. A judge at one point stopped him mid-sentence and said, “If you have any complaints about how the police collect their evidence, you may give it to the party’s discipline commission rather than raise it in court.”

Following Orders

Cai was charged with abusing his power as a company executive, misappropriating funds, and misusing the company’s registered capital.

Prosecutors claimed Cai used fake contracts to transfer 5 million yuan to a company he owned called Guangzhou Tianhe Jinpei Business Consultancy Center; 7.2 million yuan to his brother’s Siyuan Co.; and 10 million to Li’s Yijin Co.

They also said Cai misappropriated 480,000 yuan by tapping a Kungfu contingency fund and handing the money to company director Huang Jianwei without board approval.

In prosecutors’ eyes, the 8 million Cai said he used to repay loans had been transferred illegally from a corporate fund for his personal use. And they said Cai took some of Kungfu’s registered capital and used it to secure bank loans. Hong was called as a witness for the prosecution. He had been hired as a Kungfu executive as part of a company effort to separate the business from the Cai family’s interests. He was also being groomed by Cai to be his successor.

Hong testified that “whatever I did, I did it under direction from Cai.” For that statement, said the same Cai family member, prosecutors offered Hong immunity from most criminal charges.

Hong’s testimony, however, painted a chaotic picture of Kungfu operations and financial management by shedding light on inadequate bookkeeping and contingency fund controls.

The court hearings were also marked by defense lawyer arguments that police and prosecutors had failed to even consider key evidence that they had offered to support their clients’ positions. Cai’s lawyer specifically criticized police for rejecting his requests for access to certain files that could have helped his client.

He claimed authorities had blocked the efforts after Pan was allowed to take over the company. “We are not even allowed inside the company to seek evidence from Kungfu employees,” he said.

Li’s lawyer filed a civil lawsuit in another Guangdong province court in hopes of forcing police to open files about his client, but to no avail.

Li and Cai’s brother also objected to being labeled by prosecutors as “main culprits” in the alleged embezzlement scheme, claiming Hong had a much more powerful role in the company. They blamed the labeling on their family ties to Cai.

Hong and Ding pleaded guilty and asked for mercy. Prosecutors backed Hong’s plea, calling him “a professional” who had cooperated with police.

When a defense lawyer asked Hong in court why he had turned against Cai, the response was, “The boss has his own family and I have my own unmentionable difficulties.” Pan-led Kungfu’s representative asked the court to heavily penalize all the defendants except Hong. He said they had committed “heinous crimes” and “sacrificed the interests of all board of directors as well as the more than 16,000 employees of Kungfu.

The representative said each of the accused but especially Cai had been responsible for “unrecoverable losses” to the company.

Cai addressed the court with a counter argument: “The company and I are inseparable. Whatever I did was for Kungfu’s good.”

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Caixin Media Company Limited is a media group dedicated to providing high-quality and authoritative financial and business news and information. Through periodicals, online content, mobile apps,...
Why Read This?

Use extreme caution when choosing a business partner in China. That was a lesson learned the hard way by the unhappy co-founders of the Kungfu restaurant chain and laid bare for public enlightenment during a recent trial in Guangzhou. Caixin’s report on the ugly business dispute and the local government’s role gave the lesson even wider play. The story also reinforced the oft-repeated warnings to non-Chinese companies eyeing business opportunities on the mainland: Treachery happens.

By Caixin staff reporter Wang Jing

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