(Yicai Global) Nov. 8 -- Evergrande Health Industry Group, the largest shareholder in Faraday Future's operating subsidiary, has filed an arbitration counterclaim against the carmaker as it believes the firm refused entry to an Evergrande accountant looking to check the unit's books.
The case, filed at the Hong Kong International Arbitration Center, demands Faraday Future and founder Jia Yueting fulfill their contractual obligations -- furnish the investor with up-to-date figures on Smart King's financial situation.
Smart King is a joint venture founded by Season Smart -- now wholly owned by Evergrande -- and Faraday Future. Season Smart pledged USD2 billion for a 45 percent stake in the partnership while Faraday put its technical property and business on the line, giving existing shareholders a 33 percent stake in Smart King and saving 22 percent for management incentives.
An Evergrande-appointed director at Smart King has also filed a suit in the Cayman Islands, where the partnership is registered, to force the JV to disclose its financials and other related documents, according to a statement from Evergrande.
Evergrande's agreement with Faraday entitles it to review Smart King's financial status and send an accountant to monitor it, the statement added. They also agreed that unless an Evergrande accountant vetoes a Faraday-proposed outbound payment within seven days, Smart King can make that payment.
Jia is clearly trying to take advantage of this by denying the Evergrande worker access to the office, the statement said, adding that he is depriving major shareholders of the right to financial review.
Those shareholders are now unable to prevent Jia from misappropriating funds, which is a serious violation of their rights, according to a legal specialist.
Jia will do everything he can to have control over cash, a mid-level manager at his Chinese conglomerate Leshi Holdings said. He manipulates funds by transferring them between listed and unlisted companies to meet his unbounded ambitions, the manager added.
Leshi Holdings is a complex network of companies which Jia set up in his home country before racking up billions in debt and fleeing to the United States to work on Faraday, which he had kept unconnected to his failing conglomerate.
The firm's listed arm had a total business revenue of CNY22 billion (USD3.2 billion) in 2016 while Jia was at the helm, and connected transactions made up more than 50 percent.
A Financial Mess
Faraday's accounts are a mess, a former employee of the carmaker said, adding that there are no standardized processes or even an authorization system at the firm.
KPMG, one of the big four auditors, tried to work with Faraday in 2016 but gave up after half a year as it could not stay abreast of its organizational structure, according to a lawsuit filed by another former employee who set up a competing firm.
Stefan Krause, former Chief Financial Officer at BMW, joined Faraday the same year and met a similar fate. He tried to introduce a risk control system where the audit team reported straight to the board of directors to protect the company, and its suppliers, employees and shareholders, but was met by competition from Jia.
Jia is in desperate need of a new investor after Evergrande opted not to make an advance payment on the USD1.2 billion it still owes for its 45-percent stake in Smart King. It claims the joint venture failed to meet operational goals described in a confidential agreement between the two investors.
Jia has since enlisted Stifel Financial to help close a new backer. The firm is a small- to mid-sized investment bank in North America, less than 5 percent the size of Goldman Sachs, which mainly serves individuals and small enterprises.