China’s peer-to-peer lending gives rise to a couple of Bernie Madoffs

▶ Authorities say Ezubo was a $7.6 billion fraud ▶ “It was just a matter of time” before a big player blew up

Almost overnight, Ding Ning and Zhang Min struck it rich with the hot new thing in Chinese finance. They took an old-line industrial company and in 18 months transformed it into an Internet site that directly linked borrowers to lenders. But authorities say it was all a lie—a vast Ponzi scheme that seems to have been orchestrated by the Bernie Madoffs of China.

The story is a tangled tale that stretches from China’s fertile heartland in Anhui province to the wartorn reaches of northern Myanmar to the palm-lined streets of Beverly Hills. The China Banking Regulatory Commission, which oversees the industry, has warned that the explosive growth of so-called peer-to-peer (P2P) lending means other problems could be lurking out there, too. China has more than 3,600 P2P lenders.

“It was just a matter of time before we saw something this big keel over,” says Zennon Kapron, managing director of Kapronasia, a consulting firm based in Shanghai.

The alleged scheme involving Ding, Zhang, and assorted associates unraveled after a monthslong investigation into their Yucheng Group and its P2P platform, Ezubo, which had been celebrated as a new model for financial services. The numbers are staggering: Authorities say Ezubo defrauded more than 900,000 people out of the equivalent of $7.6 billion by promising them returns of up to 10 times the official deposit rate. That would make it the largest Ponzi scheme in Chinese history.

Ezubo translates to “easy-to-lease,” and it allowed the public to invest in the underlying assets of leasing contracts. Investors were then supposed to get returns—from 8 percent to 14.6 percent—from the cash paid by people taking the leases. According to the official Xinhua News Agency, however, almost 95 percent of investment projects listed on the website don’t exist. Among 207 lessors Ezubo claimed to work with, only one had done business with it, says Xinhua.

Ding, the 34-year-old chairman of Yucheng Group and its related companies, said in a confession broadcast on Feb. 1 on state-run China Central Television that he embezzled about 1.5 billion yuan ($228 million), mostly from Ezubo. He also gave 550 million yuan raised on Ezubo to Zhang, Yucheng’s president and his girlfriend, citing “personal reasons.” He said he also gave her a villa in Singapore, a pink diamond ring, an emerald necklace, and luxury cars.

Apart from Ezubo, Yucheng’s other businesses include a manufacturer of nails and screws. It had also opened a bank in an area of Myanmar disputed in a long-running civil war, China’s Caixin magazine reported. As Ezubo grew, so did Ding’s ambitions. In November, Chinese entertainment executive Bruno Wu unveiled a plan for a $1.6 billion fund to finance Hollywood movies in cooperation with Yucheng at an exclusive dinner at the W Hotel in Beverly Hills, according to the Hollywood Reporter. In an e-mail, Wu said he dropped the deal before it was finalized and expressed “shock” at Ding’s confession.

Just a few months ago state media were still giving the lender glossy