Ex-Exec Detained in Shanda Cloudary Case
An escalating clash between 2 of China’s top Internet names has taken an interesting twist, with word that a former Shanda executive has been detained just before the formal launch of his new online literature company backed by sector giant Tencent (HKEx: 700). Broadly speaking, I’m somewhat encouraged by this latest development, which shows that China may finally be preparing to crack down on perpetrators of economic crimes who in the past often faced little or no serious punishment for their offenses. At the same time, I do worry that this latest detention may have less to do with the law, and more to do with politics and guanxi. Media were all abuzz today after Shanda’s online literature unit, called Cloudary, confirmed that the former head of its core Qidian division was formally detained by police. (Chinese article) Cloudary wouldn’t give any more details, saying the investigation was ongoing. So it’s unclear if the executive, Luo Li, has been charged with a crime or is only under investigation.
The series of events the culminated in this latest development began back in March, when Luo and about 30 of his team members abruptly left Cloudary just as it was preparing to re-launch a long-delayed plan for an IPO in New York. (previous post) The group of defectors then set up a rival company, putting Cloudary and its IPO into further turmoil as it struggled to fill the huge hole left by the departure of so many key executives.
In search of funding to build his new company, Luo found a backer in the powerful Tencent (HKEx: 700), further undermining Cloudary with the sudden creation of a powerful new competitor. According to the media reports, Luo and perhaps some of his other top team members were detained just as his new company was preparing to formally launch its rival business. It’s still unclear how long Luo’s detention will delay the launch, or if the new business will launch at all.
As I’ve said above, this kind of serious response is exactly what’s needed to combat the rampant espionage and other misdeeds that occur all the time in China’s corporate world. Too often, China’s weak enforcement record and unclear legal policies meant that perpetrators of economic crimes never faced any serious punishment, allowing them to continue committing similar misdeeds with little or no disincentive to change their behavior.
During my time in China, I’ve heard way too many tales about unscrupulous Chinese who form partnerships with foreigners simply to gain access to technology and other intellectual property. They then often steal that know-how to open their own rival firms, leaving their former partners with little or no legal recourse.
We saw a positive sign late last month when police in Beijing launched a major crackdown on sites engaged in trade of pirated songs and video. (previous post) A second similar move came just days later when a top judicial official said perpetrators of food safety crimes would face stiffer punishment, including jail time in many cases.
In that context, perhaps this latest development in the Cloudary case marks the continuation of Beijing’s desire to strengthen its system for punishing economic crimes to improve the country’s business climate. But I also suspect that Shanda probably used its strong political connections in Shanghai to push for Luo’s detention, and that less well-connected companies would never be able to get such a result.
Regardless of what happened behind the scenes, this latest move should send a strong and important signal that perpetrators of corporate crimes could face serious punishment in the future. That would mark a major step forward for China at it tries to create a better, more orderly business environment for its vibrant but often unruly private sector.
Bottom line: The detention of a corporate espionage suspect in a high-profile Internet case could mark the start of stiffer penalties for economic crimes.
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