London 02/02/2016 - China's scandal-ridden Fanya Metals Exchange faked buy and sell orders to control prices on its electronic trading platform, according to a police investigation document seen by Asia-based news agency Quartz.
Fanya is based in Kunming, which is in China's Yunnan Province - its government told Kunming to investigate possible fraudulent activity last year. The city police started a probe on December 1.
The Kunming police document showed that the Fanya exchange's 'entrusting sales' programme was never approved by the country's central bank and other regulators, Quartz said.
"Fanya has defrauded 238,600 Chinese investors of more than 40 billion yuan ($6 billion) by selling financial investment products that promise annual returns of between 10 and 13 percent," Quartz said.
Officials have been told to seal Fanya's warehouses and to recover any illegal assets gained by exchange suspects. Its founder - Shang Jiuliang - and other company executives were arrested in December, it said.
Fanya was set up in 2011 and unravelled last year when problems erupted over its Ri Jin Bao product. This guaranteed retail investors annualised returns up to almost 14 percent and also promised the right to withdraw funds at any time. But these funds were frozen in April 2015.
The exchange's difficulties actually began in December 2014 when it made sweeping changes to physical trading and delivery, capital clearing and reserve, emergency management and investment business regulations.
This undermined the mood in many of the metals, raising concerns that increased scrutiny could result in major outflows of material onto markets that were heavily oversupplied.
The exchange offered markets for major specialty metals such as indium, bismuth, APT, gallium, germanium, vanadium, rhodium, selenium, tellurium, dysprosium oxide and terbium oxide as well as cobalt, tungsten and silver at times.
There are significant inventories reported by Fanya of many of these metals - in indium and bismuth totalling 3,609 and 19,228 tonnes respectively, which is far in excess of the annual global markets for these metals. Free-market prices are around multi-year lows, having halved in value from the peaks seen when Fanya stockpiling was a supportive factor.
But there are trader concerns about the veracity of the exchange's inventory figures, and whether the stockpiles are are as large as reported.
(Editing by Mark Shaw)