(Yicai Global) Dec. 11 -- Li Yuezong, an entrepreneur in over-the-counter capital allocation and virtual stock market trading, has been detained by the police, a Shanghai law enforcement source told Yicai Global.

Li is suspected of being involved in the recent plunge in the value of various listed company stocks, including Rendong Holdings [SHE: 002647], which slumped a further 10 percent today to CNY15.29 (USD2.34), bringing its decline since a Nov. 19 peak of CNY64.25 to 76 percent.

“Li and his men have been detained,” the source said. “They were arrested for their involvement in virtual stock market trading and economic fraud.”

“It is unclear how extensive this case is,” the person added.

Though less than 35 years old, Li has become wealthy through OTC capital allocation and virtual stock trading, people close to him told Yicai Global.

Apart from Rendong Holdings, other stocks including Dalian Sunasia Tourism Holding [SHA: 600593], Langbo Sealing Technologies [SHA: 603655], and Kinlita Chemical [SHE: 300225] have seen sharp drops since late November. The authorities suspect the involvement of illegal funding derived from companies controlled by Li.

Though the securities regulator has cracked down on illegal OTC capital allocation, it has not disappeared. OTC capital allocation refers to the lending of funds to investors at high ratios and the use of borrowed funds and margins in specific securities accounts for stock trading. In essence, it belongs to the securities margin trading that only licensed securities companies are legally allowed to carry out.

“In the capital allocation industry, the scale of assets Li controls is large,” said a person familiar with the matter.

Editor: Tom Litting