Taiwanese LED chip manufacturer Yang Hwa Technology owner Shih-Hsiung Chan was detained by police on Sept. 11, 2015 for suspected accounting fraud and market manipulation, according to a report by China Times.

In mid-June, Chan was interrogated by authorities over suspected accounting frauds committed over the last three years, according to a Wealth Magazine report. Five other manufacturers including Union Plus, AboCom, Unitel High Technology, Siltrontech Electronics, and Bull Will were also involved in falsely trading goods with Yang Hwa that valued an estimated NT $1 billion (US $31 million), according to a Wealth Magazine report. Yang Hwa then would list the trades in false and fabricated financial reports to apply for loans, issue convertible company bonds, or raise funds from investors. An estimated NT $2 billion has been wiped out from the company as a result of these actions.

When the case hit media headlines in September, it was considered one of the biggest financial scandals in Taiwan this year. More than 22 listed companies were involved and affected by the case, according to a separate China Times report. Chan and the company’s former Chairman Chiayi Lin have been detained by local authorities, but Chan has been singled out as the main culprit of the recent events.

How did a former leader in the LED industry and a promising star wind up embroiled in accounting scams?

By the age of 27, Chan became the founder and Chairman of AOT. As a PhD student at National Chiao Tung University, his research in MOCVD selective epitaxial growth (SEG) was considered pioneering technology at the time. He was mostly studying depositing GaAs, GaP, InP and GaInP chemicals with MOCVD during the semiconductor’s epiwafer growth phase and processing.

He was even former NCTU President Chun-Yen Chang’s most favorite student, and was chosen as a key researcher in Chang’s Nano Device Laboratories. Chan was able to utilize his knowledge in semiconductor processing in LED manufacturing after graduation.

Despite having a strong technology background, Chan lacked the necessary management skills. LED products in particular can undergo huge price fluctuations and require skilled inventory management, or manufacturers could incur significant losses.

During its earlier stages, AOT achieved stable growth and profits, due to Vice President Allen Huang (who now is Lextar’s Chairman at its Suzhou, China branch) meticulous management. The company was able to maintain Earnings Per Share (EPS) of NT $4 to NT $5. After Huang left AOT, inventory management issues started to surface, and the company performance went south. Even though AOT was already listed on the Emerging Stock Board, but it was still a step away from fulfilling its goal of becoming a listed company.

In 2007, the situation changed. Foxconn upheld a positive outlook for the LED industry, especially on China’s lighting market. Hence, its subsidiary Passion Technology entered AOT as a private investor. At the time a partnership was formed between AOT, Passion Technology, Foxconn Technology, and Fitpower Technology to develop LED streetlights to acquire market share in China. Eventually, Passion Technology acquired AOT, and the market began to speculate on China’s LED streetlight business. Passion Technology share value nearly tripled from NT $80 to NT$ 300. It was also during this time that Chan sold has stake in the company, and left AOT as a multi billionaire.

Chan, who always had a dream of becoming the chairman of a listed company in his youth then decided to use a shell company. Through an investor in Taichung, who was involved in the construction industry, Chan was able to invest and eventually acquire Mekelong. The new shell company Mekelong was previously owned by Chenhai Lin family, who rhyns the  Bao Jar Construction Company in Taiwan. After Danjing Technology (氮晶科技) invested in Yang Hua in March in March 2012, the company officially entered LED testing business.

Industry insiders  noted Chan was not very good with financial management, and entrusted all of the company finances to former company President Chiayi Lin. Lin was also in charge of another technology company financial operations Chan founded after leaving AOT. This meant Lin was able to manipulate and control all of the company’s finances. Lin used Yang Hwa’s trade with other listed companies to produce falsified financial statements. However, outsiders are uncertain whether it was Zhan or Lin headed the market manipulation, which is something prosecutors are trying to determine through further inspection.

Market insiders became aware that Yang Hwa was feeding false information to the public, when the company announced its intention of entering LED testing services. Turned out the leading LED testing facility in Taiwan and China has been Youngtek Electronics for several consecutive years, and industry insiders were puzzled about Yang Hwa’s high revenue growth presented on paper. When Yang Hwa’s shares more than tripled from NT $30 to NT $100, some industry insiders warned the company would be in deep trouble in the future.

Having acquired a shell company, Yang Hwa’s financial results soared in a three year time frame. In 2011, its revenue reached NT $328 million, but by 2012 in had nearly doubled to NT $626 million, and by 2013 it skyrocketed130% to NT $1.47 billion. In the last three years, Yang Hwa’s profitability grew exponentially from EPS NT $0.12 in 2011 to NT $1.30 in 2012, NT $2.9 in 2013, and by 2014 it peaked to NT $ 4.07.

To make their financial report convincing the company tried using the Chinese market conditions as a cover up. Last May when Yang Hwa share values breached NT $100 on the Taiwan bourse, the company claimed it was the country’s second largest LED testing company. Yang Hwa claimed its clients included prestigious Chinese LED manufacturers ETI and others. It also blatantly lied its revenue value matched competitor Youngtek Electronics, and the number of projects it acquired exceeded its production capacity, hence there were no inventory issues. The company was targeting top Chinese LED players and clients to conceal its rising inventory levels, and ongoing false tradings.

Taiwanese financial research and analysis institute iGold pointed out previous data shiowed Yang Hwa Technology top investors purchased large volumes of shares totaling 8.87 million shares from 2012 to 2013. At the time the average share value was NT$ 24, and all of the shares were sold out by November 2014. The company profited about NT $468 million from the sales.

Even though Yang Hwa’s revenue and profitability had grown significantly during the last three years, its share values during second half of 2014 was completely on an opposite track compared to its stellar financial results. The company revenue growths set new historic records, but its share prices did not rise at all. The company’s accounts receivable was also piling up. Additionally, big shareholders started to sell their shares after September 2014. Further research indicated these shareholders had cashed in all their shares before the company stock went downhill.

But what angered investors the most, was Yang Hwa continued to release deceptive company development news in late July to fool investors. Some of the positive news they released included its revenues from cloud security surveillance systems increased NT $30 million per month, and it acquired orders from Taipei MRT for synchronized surveillance recording systems. The company also plans to acquire large orders from Thailand’s cloud based surveillance equipment market sector, which is estimated to generate an order value of US $60 million. All these seemingly positive company developments are sugar coated poisonous baits to lure gullible investors to take a bite.