Analysis of Digital Domain Holdings

7/25/2019 Analysis of Digital Domain Holdings

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DISCLAIMER

The information contained herein reflects the opinions and projections of Capricious Research.

Opinions and projections contained herein are subject to change without notice. Capricious Research

does not represent that any estimate or projection will be realized. All statements contained hereinare the opinions of Capricious Research and not statements of fact.

The opinions expressed herein are not investment advice and should not be construed as investment

advice or recommendations of any kind. The opinions expressed herein are based upon Capricious

Researchs own reading of exchange filings, annual reports and other public documents. Everyone

should do their own research and consult whatever sources they deem appropriate in order to form

their own opinions on the topics covered herein.

Capricious Research has an economic interest in the decline of Digital Domain Holdings stock price,

but the economic interest of Capricious is subject to change without notice.

This material does not constitute an offer or recommendation to sell or purchase any securities and

should not be construed as such. Capricious is not acting in an investment, tax, legal or any other

advisory capacity.

Capricious Research wishes to be clear that the purpose of this material is to focus on Digital

Domain Holdings in an effort to find and disseminate information that has not been made readily

available to the public but is essential to an evaluation of the company.

The information upon which this material is based was obtained from sources believed to be reliable,

but has not been independently verified. Therefore, Capricious Research cannot guarantee its

accuracy.

Capricious Research makes no representation, express or implied, as to the accuracy, timeliness or

completeness of any information, opinion or projection contained herein, and does not undertake a

duty to update or supplement this material or any of the information contained herein.

Capricious Research explicitly disclaims any liability that may arise from the use of this material.


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CONTENTS:

Digital Domain Holdingsties to Che Fengs Ever Union:

I Ties to Ever Union: Corrupt Financing ________________________ 07

II Ties to Ever Union: Related-Party Transactions __________________ 27

Digital Domain Holdingsbusiness overview:

III DDHLs Business: Questionable Subsidiaries __________________ 51

IV DDHLs Business: Scrap MetalFabricated Financials? ____________ 52

V DDHLs Business: Joint Ventures _________________________ 61

VI DDHLs Business: Visual Effects - Good money after Bad ____________ 66


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EXECUTIVE SUMMARY

Our research indicates that Digital Domain Holdings is essentially a publicly traded extension of

Beijing Ever Union Asset Management and Ever Union Capital (collectively Ever Union), two

investment firms controlled by Che Feng, a Chinese princeling who was arrested in 2015 on chargesof corruption and money laundering.

We present documents indicating that Digital Domain Holdings management fabricated financial

statements, systematically engaged in major transactions with shell companies controlled by Ever

Union executives, and continued to do so even after merging its Hong Kong headquarters into the

offices of Ever Union Capital.

Furthermore, this material attempts to provide an answer as to why Digital Domain Holdings shut

down its scrap-metal trading business, the companys only profitable and fast-growing business

segment, without properly disclosing this fact to its investors. We showcase that Digital Domains

reporting on its scrap-metal operation is irreconcilable with publicly available customs data,indicating accounting fraud.

We can come to no other conclusion than that executives of Digital Domain Holdings have actively

set out to mislead investors, deceive regulators, and make tremendous efforts to obscure the true

nature of Digital Domain Holdingsbusiness.

What remains of Digital Domain Holdings business is a majority stake in Digital Domain 3.0, a

structurally loss-making visual effects firm that has seen its revenues slashed by 24.4% since being

acquired by Digital Domain Holdings, as well as a host of joint ventures that are either non-

operational or loss-making, yet all disproportionally rely on Digital Domain Holdings to supply

capital.

Finally, we argue that as a result of the arrest of its de-facto owner and primary financier, Che Feng,

much-needed capital is in short supply for Digital Domain Holdings.

Complicating Digital Domain Holdingssituation are the companys recentacquisitions of Immersive

Ventures and the Post Production Office. In both cases, Digital Domain Holdings has deferred the

settlement of the vast majority of the acquisition sum over an extended period of time. The deal

structures currently in place will inevitably result in systematical destruction of shareholder value

through dilutive equity offerings as Digital Domain finds itself without any other source of financing;

Digital Domain itself is unprofitable, overleveraged, cash-strapped and already repeatedly tapped

capital markets in efforts to raise working capital for its own operations.

Accounting for this information, we are bearish on the prospects of Digital Domain Holdings and

deem the companys common stock to betremendously overvalued. We value the companys stock

at HK$0.01 per share, implying 97.5% downside from current trading levels of ~HK$0,40.


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SUMMARY

I. Ties to Ever Union: Corrupt Financing

Dinghe Venture Capital and Shenzhen Xince Investment Development, two mainland

Chinese investment firms controlled by Che Feng and managed by Digital DomainHoldings former Chairman Zhou Jian, were exposed by the New York Times as

being involved in a major corruption case. Che Feng, the son-in-law of a high-ranking

communist party official, acquired shares in prominent Chinese companies from a

state-owned enterprise at unfeasibly high discounts and later sold the shares for

enormous profits. In 2009, Che Fengs investment vehicle Shenzhen Xince

Investment Development cashed out of a majority of its shares, resulting in a

corporate tax bill indicatings an annual profit of roughly US$ 1 billion. Subsequently,

the directors of Shenzhen Xince Investment Development injected tens of millions of

dollars into Digital Domain Holdings (then called Sun Innovation Holdings) through

a web of offshore shell companies in the British Virgin Islands. Upon theseinvestments, the directors of Shenzhen Xince and other associates of Che Feng gained

control of a large absolute majority of Digital Domain Holdings shares. We deem it

highly likely that Digital Domain Holdings is effectively financed near-entirely with

the proceeds of corruption. Following the concealed takeover, the board of Digital

Domain Holdings was replaced entirely. The majority of the board seats went to

associates of Che Fengs Beijing Ever Union Asset Management, Che Fengs

overarching investment vehicle that exercises control over both Dinghe and Shenzhen

Xince.

In June of 2015, Che Feng was jailed on suspicions of corruption and money

laundering. His associates continue to control a majority of Digital Domain Holdings

shares and convertible debt. Currently, Digital Domain Holdings corporate

headquarters in Hong Kong is integrated in the offices of Che Fengs Ever Union

Capital, which holds roughly half the companys convertible debt.Digital Domain

Holdings has continuously shared its office space with offshore shell companies

controlled by Che Feng and his brother Che Tao since the concealed takeover by Che

Fengs associates in late 2009.

II. Ties to Ever Union: Related-Party Transactions

Between 2012 and 2015 Digital Domain Holdings repeatedly acquired or attempted

to acquire majority stakes in companies controlled by Ever Union Capital and Ever

Union Asset Management. Among these acquisitions was the companys purchase of

a 70% stake in Digital Domain 3.0. Furthermore, we show that while Zhou Jian was

the chairman of Digital Domain Holdings, Digital Domain 3.0 licensed a key piece of

technology (MOVA) from a Shenzhen-based shell company controlled by Zhou Jian

himself. Digital Domain Holdings did not disclose this fact, nor did it seek

shareholder approval for the transaction.


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III. DDHLs Business: Questionable Subsidiaries

Since the associates of Ever Union gained control over DDHL, the company has set

up a variety of subsidiaries which generate no revenue, yet have their own offices.

One month after the concealed takeover, DDHL established a Hong Kong based

subsidiary named Sino Front Investments Limited, which filed for a commercialmoney lenders license. Sino Front received the money lenders license, which it has

since repeatedly renewed (latest renewal: 2015). DDHL has never disclosed the

purpose of its money lenders license. Digital Domain Holdings also established

various subsidiaries in mainland China under the Ever Union name. One of these

subsidiaries is registered to the address of Beijing Ever Union Asset Management.

IV. DDHLs Business: Scrap MetalFabricated Financials?

Digital Domain Holdings accounting of its scrap-metal trading subsidiary S.I. Travel

Group Limited (S.I. Travel) seems irreconcilable with publicly available customs

documents, which is reason to believe that the financials of S.I. Travel are fabricated.Digital Domain Holdings established the British Virgin Islands based S.I. Travel

several months after the concealed takeover by Che Fengs associates. S.I. Travel

accounted for 97.7% of Digital Domain Holdingsrevenue prior to its acquisition of

Digital Domain 3.0 in late 2013. In 2014, S.I. Travel accounted for 37.6% of DDHLs

total revenue. Towards the end of 2014, S.I. Travel group was suddenly shut down.

We outline a thesis explaining the sudden and mysterious termination of S.I. Travel

Groups operations, which DDHL first revealed more than 10 months after the fact.

V. DDHLs Business: Joint Ventures

Digital Domain Holdings operates several JVs, many of which seem to be largelynon-operational. Furthermore, we found that the vast majority of the companys JVs

rely disproportionally on Digital Domain Holdings to supply capital.

VI. DDHLs Business: Visual Effects - Good Money after Bad

Digital Domain Holdings biggest asset is its controlling interest in the visual effects

firm Digital Domain 3.0, which it acquired in the second half of 2013. In 2014, the

first full year under Digital Domain Holdings, DD3.0s revenuesdeclined by 24.4%

compared to 2013, while many competing firms saw strong YOY revenue growth.

Recently there were further shakeups as Digital Domain 3.0 did not renew the

contract of Eric Barba, its Chief Creative Officer and an Oscar-winning Senior VFX

Supervisor and terminated the contracts of several other high-level employees. A

valuation comparison with a rival firm shows that DDHLsstake in Digital Domain is

overvalued by as much as 97.5%. In just two years, DDHLs stake in DD3.0slosses

has far exceeded the ~US$50 million dollar purchase price ofDDHLs stake.

Meanwhile, Li Pei Xin, Chairman of Beijing Ever Union Asset Management, has

launched a copy of Digital Domain in Beijing, named Digital World.

Digital World seems to claim credit for several of Digital Domains achievementson

its website, including its hologram concert of the Chinese singer Teresa Teng.

Digital World claims to develop Virtual Reality experiences and Virtual Holograms.

Is Ever Unionshome team in China reverse engineering the intellectual property of

Digital Domain and Immersive?


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I TIES TO EVER UNION: CORRUPT FINANCING

I.I Introduction

Digital Domain Holdings Chairman, former HTC-CEO Peter Chou, has recently denied that Digital

Domain Holdings had ties to the disgraced billionaire Che Feng, and added that Che Feng does nothave any influence over the company or its board.

Peter Chou has stated1:

We make independent decisions.

Even if he [Che Feng] had a 23-percent stake he would still not be sitting on the board. Wealso have no contact; we are independent. I don't worry at all, because the right to run thecompany and its direction lies in our hands. What we do is free of interference.

When you look at a company you look at its strategy, values, profits, and direction. We are100 percent in control, there is no interference whatsoever. Presently the company structure,the director votes are all in our hands.

People are being too sensitive.

By retracing Digital Domain Holdings history, starting with the first investment made by Che Fengs

associates in 2009, we set out to prove that Peter Chous statements are completely false.

1http://english.cw.com.tw/article.do?action=show&id=14987&offset=6


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I.II Partial control

On May 25th 2009, Wise Sun Holdings Limited, a British-Virgin Islands based shell company

controlled by Zhou Jian acquired a 38.12% stake in Digital Domain Holdings (then called Sun

Innovation Holdings)2.

The financial magazine Caixin revealed that Wise Sun Holdings is merely a front for Che Feng, a

Chinese businessman who amassed billions through corruption3.

Che Feng is the son-in-law of Dai Xianglong, the former governor of the Peoples Bank of

China, Chinas central bank. Various newspapers have reported on Ches involvement in

corruption scandals centered on the investment firm Beijing Dinghe Venture Capital, which

Che controls through a web of shell companies. In a highly unusual arrangement, Beijing

Dinghe Venture Capital was reportedly able to borrow 650 million yuan interest-free from

Minsheng Bank to buy shares in Haitong Securities4. Both Minsheng and Haitong fell within

the jurisdiction of Che Fengs father-in-law Dai Xianglong.

The New York Times reported that Dinghe Venture Capital also held shares in Ping An

Insurance, which it had purchased from a state-owned enterprise at a ~75% discount,

implying corruption. Although Ches spokeswoman/ Digital Domain Holdings Independent

Non-Executive Director Jenny Lau told the New York Times that Che never held a stake5,

Caixin reported that Che led the negotiations for the purchase on behalf of Dinghe Venture

Capital and controlled Dinghe through Shenzhen-based shell companies. Dinghe purchased

the shares in Ping An Insurance for US$55 million. Five years later, in 2007, Dinghes stake

in Ping An was worth ~US$3.1 billion. Meanwhile, the value of Dinghes stake in Haitong

Securities had grown to ~US$ 1 billion6

.

Forbes took notice of the high valuation, and ranked Dinghes director / DDHL Chairman

Zhou Jian 129th on its 2008 list of richest Chinese7. Filings with the Beijing Enterprise Credit

System confirm that Zhou Jian is still a director of Dinghe Venture Capital8. Che is

known to transact through shell companies registered to his employees, friends and family,

and often uses highly sophisticated investment structures involving multiple layers of

(offshore) shell companies to evade regulatory constraints, enjoy maximum tax relief and hide

his involvement.

2http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=30762&sa2=an&sid=259801003 http://english.caixin.com/2015-06-04/100816216.html4http://www.mingjingnews.com/MIB/blog/blog_contents.aspx?ID=00005290000000305http://www.nytimes.com/2012/12/31/business/global/chinese-regulators-family-profited-from-stake-in-

insurer.html6https://www.youtube.com/watch?v=qDvJo_wLJJY7http://www.forbes.com/lists/2008/74/chinarichest08_Zhou-Jian_6YF2.html8http://qyxy.baic.gov.cn/ searched for:


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Che Feng was detained by the anti-corruption authoritiesof ChinasCommunist Party on

June 2nd 2015, along with his assistant, driver and several other associates9. According to

Caixin, the corruption probe was not focused on Dinghe Venture Capital, but was instead

focused on Ches ties to Guo Wengui, a close friend of Che who fled China after he became

ensnared in the corruption probe into former Politburo member Zhou Yongkang, who recentlyreceived the life sentence for corruption10.

Guo Wengui is a billionaire who made most of his money through his construction firm

Beijing Zenith Holdings. Wengui is rumored to have engineered the fall of Beijings Deputy

Major in order to acquire a valuable plot of land next to Beijings Olympic Stadium11. He

faces corruption charges and became one of Chinas most wantedfugitives after fleeing to the

United States. The Washington Times reported that Chinaspresident Xi Jingping himself

was expected to ask Barack Obama personally to facilitate the return of Guo Wenguito

China12.

Guo Wenguis British-Virgin-Islands based investment vehicle Head Win Group Limited

played a small yet crucial role in Digital Domain Holdings acquisition of its 70% stake in

Digital Domain, which will be outlined later in this material.

9 http://english.caixin.com/2015-06-04/100816216.html10

http://www.nytimes.com/2015/06/12/world/asia/zhou-yongkang-former-security-chief-in-china-gets-life-sentence-for-corruption.html11 http://english.caixin.com/2015-03-26/100795071.html12http://www.washingtontimes.com/news/2015/sep/23/china-seeks-return-of-2-wanted-officials


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I.III Management Control

As Wise Sun Holdings gained control of a stake larger than 35%, the acquisition triggered a

mandatory offerfor all outstanding securities of Digital Domain Holdings13. Not many parties were

interested in selling to Wise Sun, which resulted in Wise Sun acquiring only 1.70% of common stock

as a result of the mandatory offer14.

However, together with the mandatory offer, Digital Domain Holdings also announced that it would

place HK$ 200 million (~US$ 26 million) worth of convertible bonds to independent third parties,

and HK$ 120 million (~US$ 15.6 million) worth of convertible bonds to Wise Sun Holdings. The

conversion of these bonds had the potential to give Wise Sun absolute control over DDHL.

As Wise Sun Holdings increased its control over Digital Domain Holdings, it also increased its grip

on the companys board. After Wise Sun Holdings became Digital Domain Holdings largest

shareholder, the entire management was replaced: on July 21st2009, Zhou Jian and four other new

directors are appointed to the companysboard. The existing management resigned shortly after, as is

visible in this 2009 overview of Digital Domain Holdings Board15:

13 http://www.hkexnews.hk/listedco/listconews/SEHK/2009/0617/LTN20090617460.pdf14 http://www.hkexnews.hk/listedco/listconews/SEHK/2009/0810/LTN20090810414.pdf15DDHL 2009 Annual Report, p.11


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A majority of the directors appointed to the board on the 21stof July have strong ties to Che

Feng and his Beijing Ever Union Asset Management. Fan Lei was the Chief Investment

Officer of EUAMC. Digital Domain Holdings acknowledges this in its annual reports, but

misleadingly refers to Beijing Ever Union Asset Management asBeijing Changhe Century

Asset Management16.

Filings with the Beijing Enterprise Credit System show that both Zhou Jian and Fan Lei

served as directors at numerous investment companies that were registered to @euamc.com

email addresses and EUAMCs phone number. One such company is the aforementioned

Beijing Dinghe Venture Capital, where Zhou Jian served as a director.

The newly appointed independent non-executive director Lau Cheong is Ches

spokeswoman, Jenny Lau. Ms. Lau held positions at multiple firms controlled by Che Feng;

she served as the secretary of Xince (HongKong) Investment Development, a wholly owned

of subsidiary Shenzhen Xince Investment Development, which is controlled by Che Feng and

managed by Zhou Jian. Essentially, this makes Digital Domain Holdings Independent Non-

Executive Director Jenny Lau an employee of Digital Domain Holdings Executive Director

Zhou Jian.

Ms. Lau is also the president of Palau Golf Inc., which intends to build a massive golf resort

on the tiny island state of Palau, a project that Lau said has the backing of a seasoned

Chinese businessman who is in the real estate business17. The businessman turned out to be

none other than Che Feng18.

16DDHL 2009 Annual Report, p.1617http://pidp.org/pireport/2015/February/02-10-06.htm18

http://webcache.googleusercontent.com/search?q=cache:eKkCLKSPW98J:www.islandtimes.us/index.php%3F

option%3Dcom_content%26view%3Darticle%26id%3D1476%253Achinese-investor-involved-in-aimeliik-golf-

project-detained%26Itemid%3D1+&cd=1&hl=en&ct=clnk&gl=nl


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I.IV Integration

Following the resignation of the existing executives, Zhou Jian is appointed Chairman of the board.

Zhou Jian and Fan Lei together formed the executive committee of DDHL from 2009 to 2015.

Two days before Zhou Jians appointment as Chairman, Digital Domain Holdings moves itsheadquarters to Room 1717 of the Sun Hung Kai Centre19. This particular room was already

registered to a British-Virgin-Island shell company controlled by Che Fengs brother, Che Tao.

Annual reports filed by an unrelated shell company called Rock Profit International Limited

show that Che Taos address is Room 1717. Che Tao acquired a 50% stake in Rock Profit

International from Asian Base Holdings; a British-Virgin-Islands based shell company.

Another BVI shell company, Ultra Gain Development owned the other 50%.

Asian Base Holdings is controlled by DDHL shareholder Zhang Xiao Qun20.

Ultra Gain Development is controlled by DDHL Chairman Zhou Jian21.Zhang Xiao Qun and Zhou Jian are the directors of Che Fengs Dinghe Venture Capital.

Filings with the Hong Kong Exchange22 show that Che Taos BVI investment vehicle

Oriental Fortune Investments Limited was registered to Room 1717 of the Sun Hung Kai

Centre23.

19 http://www.hkexnews.hk/listedco/listconews/SEHK/2009/0916/LTN20090916396.pdf20

https://offshoreleaks.icij.org/nodes/13204721https://offshoreleaks.icij.org/nodes/15221722sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=86138&sa2=np&scpid=187448023http://offshoreleaks.icij.org/nodes/151103


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I.V Absolute Control

On September 18th2009, Zhou Jians first day as Chairman of Digital Domain Holdings, the company

completes the placement and subscription of HK$320,000,000 (~US$41,600,000) worth of

convertible debt which upon full conversion would lead to the issuance of 7,975,000,000 new shares.

At the time, the number of outstanding shares was only 1,832,686,65824, some 60% of which was inthe hands of public shareholders.

The extreme dilution triggered by the conversion25of new convertible bonds diminished the influence

of public shareholders and essentially transferred control over Digital Domain Holdings to the CB

subscribers. Because this could be seen as a Takeover, the CB subscribers had to confirm that they

are independent third parties of the company and not acting in concert with Wise Sun Holdings prior

to subscribing to the placement:

Despite confirming that they were not acting in concert with Wise Sun, the CB Subscribers

were offshore shell companies registered to employees of investment firms controlled by Che

Feng. Filings with the Hong Kong Exchange show that the recipients of the CBswere the

following parties26:

24 www.hkexnews.hk/listedco/listconews/SEHK/2009/1002/LTN20091002999.pdf25 www.hkexnews.hk/listedco/listconews/SEHK/2009/1201/LTN20091201817.pdf26

http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=33665&sa2=an&sid=25980100





http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=122590&sa2=an&sid=25980100http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=33655&sa2=an&sid=2598010



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It is our opinion that Wise Sun Holdings, Fortune Source International and Huge Rising

were acting in concert. Fortune Source Internationals Zhang Xiao Qun and Wise Sun

Holdings Zhou Jian jointly managed Shenzhen Xince Investment Development (Shenzhen

Xince), a company controlled by Che Feng27.

Kong Dalu and Zhang Xiao Qun are the directors of Xince (HongKong) Investment

Development, a wholly-owned subsidiary of Shenzhen Xince Investment Development.

Meanwhile, Digital Domain Holdings Independent Non-Executive Director Jenny Cheong

Lau served as secretary to Xince (HongKong) Investment Development.

We outlined the ties between Digital Domain Holdings and Shenzhen Xince as follows, with

the ownership percentages of DDHL based on the assumption of full conversion of all

convertible bonds at the time of the placement28:

27 http://english.caixin.com/2015-06-29/100823510.html28Sources for schematic:

http://gsxt.gdgs.gov.cn/ searched for:

http://qyxy.baic.gov.cn/ searched for:

https://www.icris.cr.gov.hk/csci/ searched for:()

As well as the Hong Kong Exchange filings for Fortune Source International,

Huge Rising and Wise Sun Holdings referred to above.


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As is visible in the schematic, Shenzhen Xince is controlled by two shell companies

registered to an @euamc.com email address, indicating that they are controlled by Che Fengs

Beijing Ever Union Asset Management29.

It is our understanding that Kong Dalu, Zhang Xiao Qun and Zhou Jian as the directors ofShenzhen Xince and its wholly-owned subsidiary should have been presumed to be acting in

concert with one another under the Hong Kong Mergers and Takeovers Code when acquiring

the option to control an absolute majority of DDHLs shares. However, they were not, and in

fact denied in writing that they were acting in concert.

As the directors of Shenzhen Xince and its wholly-owned subsidiary have the option to

control an absolute majority of Digital Domain Holdings shares exercise direct influence over

the companys board, we believe that at this point, Digital Domain Holdings could be viewed

as a variable interest entity of Shenzhen Xince.

We deem this problematic as Shenzhen Xince is a highly questionable company. Thelegitimacy of the firm was called into question by Chinese journalists after the company was

listed as one of Shenzhens top corporate taxpayers in 2009, when Shenzhen Xince paid

almost twice as much in corporate taxes than major Shenzhen-based corporations such

as Huawei. Shenzhen Xince paid more than 1.3 billion yuan in corporate taxes, indicating a

profit in the range of 5.2 to 7.2 billion yuan (~US$820 million to US$1.1 billion) over the

year 2009. When the journalists, having never heard of Shenzhen Xince, went to the

companys registered address to investigate, the company simply was not there. An

unrelated logistics company was using the offices to which Shenzhen Xince was registered.

Employees of the logistics firm had never heard of Shenzhen Xince or Zhou Jian, the firms

managing director. When the journalists then called Shenzhen Xince, the receptionist hung upafter the name Zhou Jian was mentioned. It seems as if Shenzhen Xince is a phantom

company, and a very profitable one at that30.

It is believed that Shenzhen Xince record 2009 profit was due to the sale of shares in Ping An

Insurance it controlled. Dinghe Venture Capital, another company holding shares in Ping An

is also believed to have cashed out in 2009; a thesis supported by Ping An filings.

29Euamc.com is registered by Ever Union Asset Management: http://www.whois.com/whois/euamc.com

Also note: Jinfan Baotong Investment Consultancy holds a significant stake in Henan Jiayou Home Shopping,of which Zhou Jian was an executive director according to Digital Domain Holdings annual report

DDHL Annual Report 2013 p.24, showcasing deeper integration between DDHLs executives and EUAMC. 30http://finance.qq.com/a/20090612/005206.htm


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Peculiar are the offshore investment vehicles used to subscribe to Digital Domain Holdings

placement of convertible debt. Zhang Xiao Qun used the BVI shell company Fortune Source

International Limited, which was established by Elsa Wong, an offshore services agent31.

Xu Kai subscribed to the convertible debt placement through another BVI shell company,Mass Channel Investment Limited, which was registered by the same Elsa Wong32.

ICIJ data shows that Elsa Wongs operated from Room 1717of the Sun Hung Kai Centre,

Digital Domain Holdings corporate headquartersin Hong Kong33.

Did all these supposedly independent third parties of Digital Domain Holdings come into the

offices of Digital Domain Holdings to establish offshore shell companies which they would

then use to inject capital into Digital Domain Holdings?

Ms. Wong seems to primarily register companies on behalf of Che Feng, his relatives and his

associates. Among the firms she registered are Che Fengs Ever Union Capital, Zhou JiansUltra Gain Development and Zhang Xiao Quns Asian Base Holdings34.

We believe it should be abundantly clear by now that Zhang Xiao Qun, Zhou Jian and Kong

Dalu are all just fronting for Che Fengs Beijing Ever Union Asset Management.

31

https://offshoreleaks.icij.org/nodes/15308032https://offshoreleaks.icij.org/nodes/16093533https://offshoreleaks.icij.org/nodes/23682634https://offshoreleaks.icij.org/nodes/290675


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To make the Ever Union tie-in complete, Kong DalusLinkedIn profile shows that he is the

managing director of Ever Union Capital35.

But Kong Dalu isnt the only one blatantly fronting for CheFeng: Zhang Xiao Qun listed the

address of the property investment firm Shanghai Tianjin Real Estate Development as hisresidential address in annual reports of Xince (HongKong) Investment Development.

Shanghai Tianjin Real Estate was directly controlled by Che Feng36. Meanwhile, Kong Dalu

listed the address of Beijing Ever Union Asset Management as his residential address.

Kong Dalus offshorevehicle Huge Rising Limited is the most obvious front for Che Feng.

Before Huge Rising injected capital into Digital Domain Holdings, it purchased a sizeable

stake in another public company. Filings with the Hong Kong Exchange regarding this

acquisition show that Che Feng was the owner of Huge Rising Limited37.

Aside from holding executive positions at Ever Union Capital and Xince HongKong, Kong

Dalu was also a director at Haitong Securities, in which Dinghe Venture Capital held asizeable stake. An overview of directors positions in shareholder entities from Haitong

Securities 2009 Annual Report shows that Kong Dalu was the Deputy General Manager

of Dinghe Venture Capital from 2007 on, and still held that position at the date of

publication of the annual report in 201038.

35https://www.linkedin.com/profile/view?id=30706122336

http://file.irasia.com/listco/hk/pingan/circulars/c060407.pdf37http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=14954&sa2=np&scpid=218203038http://quote.morningstar.com/stock-filing/Annual-

Report/2009/12/31/t.aspx?t=XSHG:600837&ft=&d=41caba516d9c0be7c85ada337628ea9f p. 21


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Beijing Enterprise Credit data shows that Zhang Xiao Qun and Zhou Jian are respectively the

managing director and the director of Dinghe Venture Capital.

Before his tenure as director at Haitong Securities, Kong Dalu worked as a senior executive at

Minsheng Bank39

, which had provided Dinghe Venture Capital with questionable loans tofinance its purchase of shares in Haitong Securities40.

Dinghe Venture Capital, much like Shenzhen Xince Investment Development, seems to have

cashed out its stake in Ping An Insurance between 2008 and 2009. According to the New

York Times, Dinghe is expected to have profited more than US$ 3 billion on the sale41.

We deem it highly likely that the proceeds of these corrupt deals were injected into Digital

Domain Holdings through Wise Sun Holdings, Fortune Source International and Huge Rising.

39

http://www.bloomberg.com/research/stocks/people/person.asp?personId=265629007&capId=1049487740http://www.mingjingnews.com/MIB/blog/blog_contents.aspx?ID=000052900000003041http://www.nytimes.com/2012/12/31/business/global/chinese-regulators-family-profited-from-stake-in-

insurer.html?_r=0


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After the injection of capital into Digital Domain Holdings through the subscription and

placement of convertible bonds, Kong Dalus Huge Rising, Xu Kais Mass Channel

Investment and Zhang Xiao Quns Fortune Source International all sold portions of their

securities in off-exchange deals.

- Huge Rising sold the majority of its stake to three BVI shell companies. The three

companies purchased stakes of 4.3%, 4.6% and 4.9% respectively. Huge Rising retained a

4.9% stake.

- Mass Channel Investment later sold 14.7% of its 17.8% stake to 3 or more investors in an

off-exchange deal. Mass Channel retained 3.1%.

- Fortune Source sold a 4.3% stake and retained 12.3% stake.

As a result of these sales, half of Digital Domain Holdings shares are in the hands of investors

holding less than 5%, who no longer have to disclose their shareholding to the exchange.

Based on Hong Kong Exchange filings, three buyers could be identified, all of whom are once

again closely associated to Che Feng and his Ever Union:

- Quantum Base Company purchased 4.3% from Huge Rising42.

Quantum Base Companys owner is Li Pei Xin, chairman of Ever Union Asset

Management43.

- Progress Mind Investment purchased 4.6% from Huge Rising44.

Progress Mind Investments owner is Xiao Ping, a director of Shenzhen Xince

Investment45. Progress Mind Investment was registered by Elsa Wong46.

- Trendy Base Company purchased 4.9% from Huge Rising47.

Trendy Base Companys owner is Zhou Fulin, Vice Chairman of Beijing Worthope

Sathen Network Technology, where Che Feng served as Chairman48.

42The listed figure is 9.48%. Dilution triggered by conversions lowered this figure to 4.3% by year-end 2009.

http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=124413&sa2=np&scpid=195783443http://qyxy.baic.gov.cn/ searched for:44The listed figure is 11.33%. Dilution triggered by conversions and share sales of previously owned stock

lowered this figure to 4.7% by year-end 2009.

http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=124412&sa2=np&scpid=195783245http://finance.qq.com/a/20090612/005206.htm46http://offshoreleaks.icij.org/nodes/15593847

The listed figure is 10.74%. Dilution triggered by conversions lowered this figure to 4.9% by year-end 2009.http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=34287&sa2=np&scpid=1957804

48http://www.icij.org/offshore/china-who-uses-offshore-tax-havens#people/che-feng

note: Wo He, Worthope, and Yaohe all refer to .


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Che Feng was also the Chairman and CEO of Hong Kong Worthope Technology Group

Limited while Zhou Fulin served as president of Beijing Worthope Technology

Development49. Filings with the Beijing Enterprise Credit System show that Beijing

Worthope Technology Development is registered to an @euamc.com email address,

indicating it is controlled by Beijing Ever Union Asset Management50.

Filings from Ping An Insurance show that Zhou Fulin was appointed as supervisor to Ping An

Insurance shortly after Dinghe Venture Capital acquired its stake in the company. After

Zhou Fulins three year term at Ping An was over, he was succeeded by Che Feng himself51.

We believe that these deals of just under 5% of DDHLs securitieswere only intended to

obscure the ownership structure of Digital Domain Holdings, and were not regular

transactions.

Corroborating our thesis are the sale prices: When Huge Rising Limited sold convertible

bonds to Trendy Base, Quantum Base and Progress Mind, the average transaction sum for asingle bonds was HK$0.078. The bonds were freely convertible into shares that traded on the

exchange for HK$0.22. Huge Rising was effectively selling at a discount of ~64.5%.

Furthermore, we sense a high degree of artificial randomness in the deal structure. Notice the

numbers of convertible bonds initially subscribed to by Fortune Source, Huge Rising and

Mass Channel (1500m, 1625m, 1750m). When Huge Rising sells its securities to Progress

Mind, Trendy Base and Quantum Base, a similar pattern unfolds (375m, 400m, 425m).

The pricing for these transactions shows a similar pattern: 375m CBs were sold at HK$0.075

each, 400m CBs were sold at HK$0.078 each, and 425m shares were sold at HK$0.080 each.

This is effectively a structure where volume discounts have gone negative, further indicatingthat these are not regular transactions.

49 http://www.hkexnews.hk/listedco/listconews/SEHK/2005/0428/02318/F106.pdf50http://qyxy.baic.gov.cn/ searched for: 51 http://file.irasia.com/listco/hk/pingan/circulars/c060407.pdf


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I.VI Sustained Integration

As the associates of Che Feng consolidated their control over Digital Domain Holdings; the company

remained closely integrated with Che Tao and his British-Virgin-Islands based investment vehicle

Oriental Fortune Investments.

Zhou Jians Wise Sun Holdings then sold 950,000,000 shares in Digital Domain Holdings to Che

Taos Oriental Fortune Investments in an off-exchange deal52. Che Tao paid HK$0.06 per share

for the 10.69% stake. Meanwhile, Digital Domain Holdings shares traded on the Hong Kong

exchange closed at HK$0.325 that day, ~442% more than the 0.06 per share paid by Che Tao.

The purchase by Oriental Fortune Investments is not just questionable because of the unusually high

discount it received, but mostly because Digital Domain Holdings shared office space with Oriental

Fortune, making it highly probable that Oriental Fortune was trading on inside information.

Filings with the Hong Kong Exchange show that Oriental Fortune did not fill out an address on its

Form 2 regarding the acquisition of a substantial stake in Digital Domain Holdings, hiding the ratherimportant notion that Oriental Fortune shared office space with Digital Domain Holdings53. It is our

opinion that by not fully filling out its Form 2, Oriental Fortune obscures its true connection to DDHL

from regulators and investors.

Oriental Fortune Investments did list its address on forms unrelated to Digital Domain Holdings:

52http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=155941&sa2=an&sid=25980100

http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=44240&sa2=np&scpid=210448153http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=155950&sa2=an&sid=25980100


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I.VII Conclusion

By retracing the early history of Digital Domain Holdings, we believe to have proven that:

- The associates of Che Feng controlled a majority of DigitalDomain Holdings board.

-

The associates of Che Feng controlled a majority of Digital Domain Holdingssecurities.- Digital Domain Holdings shared its offices with an offshore investment vehicle controlled

by Che Fengs brother, Che Tao.

Based on our reconstruction of the events following the placement and subscription of convertible

debt in late 2009, Che Feng assumed control of between 79.7% and 88.0% of the total of outstanding

shares and convertible bonds in Digital Domain Holdings54:

55

Effectively, we believe that the placement and subscription of convertible bonds meant that

absolute control of Digital Domain Holdings was transferred to Che Feng at the cost of public

shareholders.

54The convertible notes subscribed to by unidentified could be subscribed to by parties unrelated to Che Feng,

something we deem unlikely given that all the other subscribers were closely associates with Che Feng.

The percentages also do not account for associates of Che Feng holding shares as public shareholders.

Progress Mind Investment for example already held 1.22% in DDHL shares prior to buying a sizeable stakefrom Huge Rising, meaning that the associates of Che Feng were likely to control more than 90% of DDHL

after the placement. http://sdinotice.hkex.com.hk/di/NSForm2.aspx?fn=124412&sa2=np&scpid=195783255 http://www.hkexnews.hk/listedco/listconews/SEHK/2009/1201/LTN20091201817.pdf


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The subsequent salesby Ches associates to other associates of Shenzhen Xince Investment and Ever

Union Asset Management corroborate our thesis, and have resulted in roughly half of Digital Domain

Holdings shares to be considered as held by public shareholders, despite still being controlled by

the associates of Che Feng.

We deem the deal structure of these sales to be too artificial, the pricing structure too irregular and the

parties involved too intertwined for these deals to be regular transactions; we are convinced that Huge

Rising, Mass Channel Investment, Progress Mind Investment, Quantum Base Company and Trendy

Base Company are all merely fronting Che Feng in exactly the same way that Caixin has alleged

Fortune Source International and Wise Sun Holdings are56.

The fact that the majority of Digital Domain Holdings capital has originated from British Virgin

Islands based shell companies controlled by the directors of Shenzhen Xince Investment and Dinghe

Venture Capital, two highly questionable firms entangled in a seemingly ongoing corruption scandal,

is more than sufficient reason to doubt the legitimacy of Digital Domain Holdings financing.

Based on our analysis of Digital Domain Holdings early history, we can say with confidence that

Digital Domain Holdings is highly likely to be majority financed with the proceeds of corruption.

The result of the analyzed events continue to be at the core of Digital Domain Holdings shareholding

structure today. It is highly likely that the associates of Che Feng still hold their many stakes of ~ 4%,

and thus still control an absolute majority of Digital Domain Holdings shares.

Today, Wise Sun Holdings and Fortune Source International are still among the companys largest

shareholders. Cheong Lau is still on the board of Digital Domain Holdings. Zhou Jian, although

replaced as chairman by Peter Chou, is still with the firm as a senior advisor. Fan Lei, although

replaced as executive director, remains active as a director at nearly allof the companys subsidiaries.

The most transformative event in the history of DDHLs ownership structure has been the acquisition

of Digital Domain 3.0, which was financed with convertible notes placed directly to Che Fengs Ever

Union Capital, an event which will be covered in the next chapter.

Recall that Digital Domain Holdingscurrent Chairman Peter Chou has said:

We make independent decisions.

Even if he [Che Feng] had a 23-percent stake he would still not be sitting on the board. We

also have no contact; we are independent. I don't worry at all, because the right to run thecompany and its direction lies in our hands. What we do is free of interference.

. People are being too sensitive.

By now, we believe to have proven that Digital Domain Holdings is far from independent. In the next

chapter, we present evidence that while under the absolute control of Che Fengs associates between

2010 and 2015, Digital Domain Holdings systematically engaged in transactions with shell companies

linked to Che Fengs Beijing Ever Union Asset Management, proving the very interference which

Peter Chou denies, while at the same time proving that we are not too sensitive.

56 http://english.caixin.com/2015-06-29/100823510.html


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II. TIES TO EVER UNION: RELATED PARTY TRANSACTIONS

II.I Related-Party Transaction 1: Shenzhen Tuohe

On July 13th, 2012, Digital Domain Holdings announced a major transaction: It would acquire

Shenzhen Tuohe Investment Development (Shenzhen Tuohe) from Shenzhen Xinhe TechnologyDevelopment (Shenzhen Xinhe) and Beijing Jingbaiqi Asset Management (Beijing Jingbaiqi )57.

Shenzhen Tuohe is an investment holding company that owns a 70% stake in Kaiyuan Management,

which in turn owns the Kaiyuan Hospital, an orthopedic hospital in Shanghai. Additionally, Shenzhen

Tuohe owns a purchase option which allows the company to acquire an additional 10% stake in

Kaiyuan Management.

Digital Domain Holdings would pay RMB77,000,000 (~US$12,320,000) for Shenzhen Tuohe.

Additionally, DDHL agreed to repay RMB133,605,100 (~US$21,375,000) owed by Shenzhen Tuohe

to Shenzhen Xinhe and Beijing Jingbaiqi, bringing the total consideration to RMB240,605,100(~US$33,695,000).

Digital Domain Holdings established a Hong Kong subsidiary called Ever UnionMedical Services

Groupthrough which the company would acquire Shenzhen Tuohe.

Digital Domain Holdingschoice to name its subsidiary Ever Unionis curious as this subsidiary is

set up long before Ever Union Capital takes a stake in Digital Domain Holdings. It is our opinion that

the choice for the Ever Union name corroborates the thesis that Digital Domain Holdings is under

absolute control of Che Fengs Ever Union, despite the name Ever Union never showing up in its list

of substantial shareholders at the time Digital Domain Holdings established Ever Union Medical

Services Group.

Digital Domain Holdings in an announcement provided the following before-and-after schematic for

the acquisition, in which it refers to its subsidiary Ever Union Medical Services Group simply as

Ever Union:

57 http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0713/LTN20120713651.pdf


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58

58Digital Domain Holdings announcement dated July 13th, 2012


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In the announcement, Digital Domain Holdings reports the following:

To the best of the Directors knowledge, information and belief, having made all reasonable

enquiries, each of Shenzhen Xinhe, Beijing Jingbaiqi, their respective ultimate beneficial

owners, Mr. Tan [Zhenyu] and Mr. Qin [Zhiming] is a third party independent of thecompany and its connected persons.

Before it can be assessed whether or not this statement is true, the ultimate beneficial owners of

Shenzhen Xinhe and Beijing Jingbaiqi need to be identified.

Based on data from the Guangdong and Beijing Enterprise Credit Databases, the ownership structure

can be outlined as follows:


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59

59Sources for schematic:http://gsxt.gdgs.gov.cn/ searched for:



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As is visible in the schematic, Shenzhen Tuohe is owned by three Beijing based investment

vehicles, all of which are registered to an @euamc.com email address, indicating that these are

shell companies controlled by Che FengsBeijing Ever Union Asset Management, of which Digital

Domain Holdings Executive Director Fan Lei was the Chief Investment Director.

According to Digital Domain Holdings annual reports, Fan Lei seized being the CID of EUAMC

somewhere during the year 201260. It is unclear if Fan Lei was the CID at the time of the acquisition.

Fan Leis involvement in both EUAMC and DDHL seems suspect nonetheless, especially when

considering that Fan later seems to claim that he resigned from his position at EUAMC before

becoming an executive of DDHL61, which is contradicted by DDHLs annual reports.

Effectively, Digital Domain Holdings seems to use an investment vehicle that it calls Ever Union to

buy a hospital from three shell companies linked to Beijing Ever Union, upon which Digital Domain

Holdings executive director Fan Lei, himself an executive of Beijing Ever Union, claims that all

parties to the transaction are to his best knowledge, information and belief, independent.

The independence of Digital Domain Holdings other executive, Zhou Jian, is also questionable.

Zhou Jian was the managing director of Zhujiang Joint Investment Management and a director of

Dinghe Venture Capital, companies in which Shenzhen Xinhe Technology Development invested.

Digital Domain Holdings executives(green), substantial shareholders / convertible bondholders

(blue) and acquisition counterparties (red) all held executive positions at investment firms

linked to Ever Union62:

60DDHL 2012 Annual Report p.2161http://stock.aganjinrong.com/companies/83280762http://qyxy.baic.gov.cn/ searched for:


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We believe this is compelling evidence that effectively, all of the parties to the Shenzhen Tuohe

acquisition were connected, as they were effectively all employees of Che Fengs investment firms.

However, there is more that suggests that the parties to this acquisition were not truly independent; on

the very same day that Digital Domain Holdings established Ever Union Medical Services GroupLimited,through which it would purchase Shenzhen Tuohe, a company was established by the name

of Ever Union Medical Group Limited, documents from the Hong Kong Companies Registry

show63.

Ever Union Medical Group and Ever Union Medical Services Group were both incorporated on 12-

03-2012, more than four months prior to Digital Domain Holdings first mentioning its plans to

acquire Shenzhen Tuohe. Unlike Digital Domain Holdings subsidiary Ever Union Medical Services

Group, the company Ever Union Medical Group is not mentioned in DDHLs announcement

regarding the acquisition at all, and is not affiliated with Digital Domain Holdings.

The owner of Ever Union Medical Group Limited is a British Virgin Islands based shell company

named True Elite Investments Limited. The sole director of Ever Union Medical Group Limited isnone other thanTan Zhenyu, the managing director of Shenzhen Xinhe Technology Development.

Making the confusion complete, Digital Domain Holdings renamed its subsidiary Sun Innovation

Development Limited to Ever Union Medical Services Limited on February 9th201264.

If Digital Domain is truly independent of Tan Zhenyu, why did they both incorporate eerily similar-

named Hong Kong companies on the exact same day more than 4 months before the first disclosure of

any future transaction between Digital Domain and Tan Zhenyu?

63http://www.cr.gov.hk/docs/wrpt/wk_new&changednamecoys_20120312.pdf64DDHL 2011 Annual Report, p.82


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The vendor in the proposed acquisition, Shenzhen Xinhe Technology, is eerily similar to Shenzhen

Xince Investment, which is controlled by Che Feng and headed by then-DDHL chairman Zhou Jian.

Data from the Guangdong Enterprise Credit System shows that Shenzhen Xince Investment shares its

office space with Shenzhen Xinhe Technology. Futhermore, it shows that a variety of other shellcompanies were registered to the exact same address, phone number and email address as Shenzhen

Xinhe. Many of these shell companies list substantial shareholders of Digital Domain Holdings

as well as Digital Domain Holdings Chairman Zhou Jian as their directors65:

Recall that when investigative journalists went to find the mysterious Shenzhen Xince Investment at

Unit C-E on the 20thfloor of the Hanglu Building after its 2009 profits exceeded~US$1 billion, they

found an unrelated logistics company, and not a trace of Shenzhen Xince or its managing director

Zhou Jian.

Reconsider this story in light of the information that there are at least four other investment firms

registered to the same address as Shenzhen Xince, including Shenzhen Tuohe and Shenzhen Xinhe.

There seems to be a vast network of phantom companiesestablished by Digital Domain Holdings

executivesand substantial shareholders.

Interestingly enough Digital Domain Holdings acquisition target, Shenzhen Tuohe, is registered to

almost the same email address as DDHLs Shenzhen-based subsidiary Digital Domain (Shenzhen)

Technology Development.

We believe that the email address [email protected] to Shenzhen Tuohes executive Cao

Xi. The email address used to register Digital Domains Shenzhen based subsidiary,

[email protected], is near identical. [email protected] was previously used as the

registered email address of the billion dollar phantom company Shenzhen Xince66, raising the

question: What is the full extent of Digital Domains relationship to these phantom companies?

65http://finance.qq.com/a/20090612/005206.htm &

http://gsxt.gdgs.gov.cn/aiccips searched for:

66http://www.1024sj.com/com/qiye.aspx?id=16368242


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II.II Related-Party Transaction 2: Digital Domain 3.0

In the bankruptcy auction of American visual effects and animation company Digital Domain Media

Group, the companys flagship visual effects production division, Digital Domain, was sold to the

Chinese independent movie production house Beijing Galloping Horse and Reliance MediaWorks.

Galloping Horse, which acquired 70% of the shares of Digital Domain, was planning an IPO in China

and thus could not raise additional financing to support Digital Domains large losses. As a result, it

had to dispose of its stake in the company shortly after the acquisition. The buyer of the stake was the

Hong Kong Exchange listed Sun Innovation Holdings, currently known as Digital Domain Holdings.

At least, that is the official story, which is filled with half-truths and fails to acknowledge the role that

the Chinese financiers Che Feng, Guo Wengui and Xiao Jianhua played in the acquisition.

Our reconstruction of the events surrounding the Digital Domain bankruptcy and subsequent sale sto

Galloping Horse and Digital Domain Holdings indicates that Beijing Galloping Horse never held a

70% stake in Digital Domain, and revealed that Che Feng and his associates were preying on DigitalDomain even before the company went bust.


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Reconstruction: Digital Domains demise and resurrection

March 30th, 2012 Digital Domain Media Group files its 10-K showing a record loss of

US$140.7 millionover the year 201167.

August 13th, 2012 Digital Domain Media Group hires Wells Fargo Securities as advisor

to explore strategic options. The company suggests a possible sale68.

September 6th, 2012 Che Feng establishes Upfield Sky Limited, a British Virgin Islands

shell company.

September 7th, 2012 Digital Domain Media Group lays off 300 artists, shuts down its

branch in Port St. Lucie. CEO John Textor resigns in disagreement

with theboards decision to close the Port St. Lucie branch69.

September 11th, 2012 Digital Domain Media Group declares chapter 11 bankruptcy70.

The visual effects firm Digital Domain is to be sold in a bankruptcy

auction, which is scheduled for September 21st.

Exact date unknown Galloping Horse, Tomorrow Holdings and Che Fengs Harmony

Energy pool funds for the purchase of Digital Domain together in

Upfield Sky, which is now 42.86% controlled by Che. The remaining

57.14% is split between Galloping Horse and Tomorrow Holdings71.

September 17th, 2012 Four days prior to Digital Domains bankruptcy auction Upfield Sky

sets up a subsidiary in Delaware called Galloping Horse America

LLC, through which it will purchase Digital Domain.

September 19th, 2012 Two days prior to the bankruptcy auction, Digital Domain Holdings

(then called Sun Innovation Holdings) Chairman Zhou Jian is

invited by Che Feng to oversee the business of Upfield Sky Limited.

Zou Jian becomes a director of Upfield Sky Limited72.

September 21st, 2012 During the bankruptcy auction, the Upfield Sky consortium teams up

with Reliance Mediaworks in a bid to acquire Digital Domain.

67http://quote.morningstar.com/stock-filing/Annual-Report/2011/12/31/t.aspx?t=:DDMG&ft=10-

K&d=52231c355996afa65df67e39a5b82a4968http://finance.yahoo.com/news/digital-domain-media-considering-strategic-121647889.html69http://www.cartoonbrew.com/business/digital-domains-legend-of-tembo-shuts-down-production-dozens-

of-animation-artists-lose-their-jobs-john-textor-is-ousted-69456.html70 http://www.kccllc.net/ddmg/document/121256812091100000000003971 http://m.finance.sina.com.hk/news/article/7916722/33452/2015081072 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0328/LTN201303281844.pdf


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September 22nd, 2012 Digital Domain confirms it will be sold to Beijing Galloping Horse

and Reliance MediaWorks73. Galloping Horse America LLC (which

is renamed Galloping Horse-Reliance LLC and is 30% owned by

Reliance and 70% owned by Upfield Sky Limited) will acquire the

company.

Effectively, Beijing Galloping Horse never owned 70% of Digital

Domain 3.0. The actual ownership structure was 30% Reliance,

30% Che Feng, with the remaining 40% shared between Beijing

Galloping Horse and Tomorrow Holdings.

The New York Times confirms the acquisition of Digital Domain by

Beijing Galloping Horse was financed by Che Feng and Xiao

Jianhuas Tomorrow Holdings74. Xiao Jianhua himself later clarified

in a statement that an unspecified Tomorrow Holdings subsidiary co-

invested with Che Feng and acquired shares in Digital Domain at the

same price as Che Feng75.

September 25th, 2012 Bankruptcy court approves sale to Galloping Horse-Reliance LLC76.

Exact date unknown Digital Domain 3.0s losses force Upfield Sky to keep raising

money to keep the company afloat. As Beijing Galloping Horse was

cash-strapped, the additional financing comes from Che Feng. The

additional investment raises Ches stake in Upfield Sky Limited to

48.60%, bringing his total share of Digital Domain to 34%.

September 29th, 2012 Che Fengs brother Che Taoflips the majority of his ~10% stake inDigital Domain Holdings (then called Sun Innovation Holdings) to

a BVI shell company called Head Win Group Limited, which is

controlled by Che Fengs friend Guo Wengui77. This clears the way

for Digital Domain Holdings to transact directly with Che Feng

without Che Feng being considered a connected person of the

company (which he would have been if his brother were still a

substantial shareholder).

October 26th, 2012 Digital Domain Holdings (then called Sun Innovation Holdings)

terminates its MOU to acquire Shenzhen Tuohe

78

.

73 http://variety.com/2012/film/news/digital-domain-acquired-by-galloping-horse-1118059686/74 http://www.nytimes.com/2014/06/04/world/asia/tiananmen-era-students-different-path-to-power-in-

china.html75http://sinosphere.blogs.nytimes.com/2014/06/05/billionaire-issues-statement-about-times-article/76http://www.debevoise.com/insights/news/2012/09/debevoise-advises-galloping-horse-in-joint-ventu__77

http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=53127&sa2=np&scpid=2104481http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=53152&sa2=np&scpid=2117312

http://english.caixin.com/2015-06-04/100816216.html78 http://www.hkexnews.hk/listedco/listconews/SEHK/2012/1026/LTN20121026214.pdf


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October 26th, 2012 Zhou Jian resigns as Director of Upfield Sky Limited to avoid

conflicts of interest.79We believe this means October 26thmarks the

starting date of the attempt to inject Ches stake inUpfield Sky into

Sun Innovation Holdings. After all, an acquisition with Zhou Jian as

director of Upfield Sky and Chairman of Sun Innovation Holdingswould constitute a conflict of interest. Notice that this is merely a

month after the sale to Galloping Horse-Reliance was approved.

November 14th, 2012 Digital Domain Holdings (then called Sun Innovation Holdings)

confirms it is in talks with an independent third party to explore

a possible acquisition80.

November 14th, 2012 Digital Domain Holdings (then called Sun Innovation Holdings)

noticed a clerical error in its original announcement, and puts out a

clarification announcement: it is in talks with independent third

partiesto explore a possible acquisition81.

November 18th2012 Digital Domain Holdings (then called Sun Innovation Holdings)

Chairman Zhou Jian announces the company has entered into an

MOU with Mr. Che Feng and Ms. Gegen Tana to purchase

some or all of the shares of a company which is involved in the

production of visual effects82.

November 21st, 2012 Galloping Horse US LLC is formed in Delaware, and is placed as a

layer between Upfield Sky and Galloping Horse-Reliance, allowing

for the sale of Upfield Sky to Digital Domain Holdings (then called

Sun Innovation Holdings).

November 29th, 2012 Digital Domain 3.0 announces across-the-board pay cuts, causing

an exodus of talent83.

December 31st, 2012 Upfield Sky Limited registered a loss of HK$82,914,000 between

its incorporation on September 6thand December 31st, indicating that

Digital Domain 3.0 lost US$ 15,400,000 in just three months.

Exact date unknown Che Feng unilaterally breaks his cooperation agreement with Beijing

Galloping Horse and strong-arms Beijing Galloping Horse into

selling its stake in Upfield Sky. Upon acquiring Galloping Horse and

Tomorrow Holdings stakes in Upfield Sky, Che has full control over

the company, enabling him to list the company entirely as part of

Digital Domain Holdings (then called Sun Innovation Holdings).

79 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0328/LTN201303281844.pdf80

http://www.hkexnews.hk/listedco/listconews/SEHK/2012/1114/LTN20121114302.pdf81 http://www.hkexnews.hk/listedco/listconews/SEHK/2012/1114/LTN20121114508.pdf82 http://www.hkexnews.hk/listedco/listconews/SEHK/2012/1119/LTN20121119005.pdf83https://vfxsoldier.wordpress.com/2012/11/29/digital-domain-pay-cuts/


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March 27th, 2013 Digital Domain Holdings (then called Sun Innovation Holdings)

announces it has entered into a Sale and Purchase agreement pursuant

to which it will acquire 100% of Upfield Sky Limitedfrom Che

Feng and Gegen Tana84. The company will finance the entire

consideration for the acquisition by the issuance of zero-interestconvertible debt to Gegen Tana and Ches Harmony Energy. Both

receive roughly 5 billion convertible notes, which upon

conversion would double the amount of outstanding DDHL shares.

In its announcement the company admits that both of its executives

are not fully independent of the Vendor, yet fails to mention Fan

Leis role at Harmony Energy Limited or comment on his role as

Chief Investment Director at Beijing Ever Union Asset

Management85:

July 27th, 2013 Digital Domain Holdings (then called Sun Innovation Holdings)

acquires 100% of Upfield Sky Limited and its 70% stake in DD3.086.

On the same day, Digital Domain Holdings executive Daniel Seah is

appointed as CEO of Digital Domain 3.0, replacing Ed Ulbrich87.

July 29th, 2013 In an interview with Variety, Digital Domains new CEO Daniel

Seah attempts to obscure Che Fengs involvement in DDHLs

acquisition of Upfield Sky Limited, refusing to use his name and

referring to Che only as Upfield Sky88.

October 8th, 2013 Sun Innovation Holdings proposes to rename itself Digital Domain

Holdings89.

84 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0328/LTN201303281844.pdf85Fan Lei is listed as the contact person for Harmony Energy Limited in filings with the SEC:

http://www.sec.gov/Archives/edgar/data/1489271/000095012310035698/h03788a1exv10w48.htm86

http://www.businesswire.com/news/home/20130726005913/en87http://www.businesswire.com/news/home/20130726005914/en88 http://variety.com/2013/biz/asia/inside-the-sale-of-digital-domain-to-sun-innovation-1200568954/89 http://www.hkexnews.hk/listedco/listconews/SEHK/2013/1008/LTN20131008370.pdf


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December 31st, 2013 Digital Domain Holdings2013 annual report indicates that Digital

Domain 3.0 lost ~US$68 million over the year 2013,

~US$ 47 million of which since the acquisition by Digital Domain

Holdings90.

January 5th, 2014 Beijing Galloping Horse CEO Li Ming dies while under interrogation

by the Central Commision for Discipline Inspection, Chinas top

anti-corruption body91.

January 19th, 2014 Guo Wengui is spotted on Malta, where he is said to have purchased

a European passport92. He flew to Malta on a private jet registered to

his offshore investment vehicle Head Win Group Limited93.

September 15th, 2014 Gegen Tana, who had received ~5 billion convertible notes in Digital

Domain Holdings following the sale of Upfield Sky to DDHL, sells

her entire position to Wei Huo Li94, a director of [email protected] registered companies. Gegen Tana sells the notes

at HK$0.035 each, a discount of 70.8%; DDHLs shares on the

exchange closed at HK$0.12 at the day of the sale.

January 12th, 2015 Beijing Zenith Holdings, Guo Wenguis construction conglomerate,

reports it has lost contact with two executives, a commonly used

euphemism for executives being arrested in a corruption probe95.

January 16th, 2015 Guo Wengui sells his entire stake in Digital Domain Holdings to

unidentified buyers in an off-exchange deal and has since become

one of Chinas most wanted fugitives96.

April 1st, 2015 Digital Domain Holdings moves into the offices of Ever Union

Capital and its subsidiary Ever Union Asset Management.

Ever Union Capital had earlier obscured its address on exchange

filings relating to Digital Domain Holdings97.

June 2nd, 2015 Che Feng is arrested by the Central Commission for Discipline

Inspection at a business dinner in Beijing.

90DDHL 2013 Annual Report, p.10291http://www.hollywoodreporter.com/news/galloping-horse-ceos-death-linked-67598492https://www.youtube.com/watch?v=Tg5FXaUxYXs93The plane is visible in the youtube video referred to before. High-resolution pictures of the plane:

https://www.planespotters.net/Aviation_Photos/search.php?reg=M-GYQM94http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=65719&sa2=np&scpid=2208760 &

http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=65621&sa2=np&scpid=220798195

http://www.bloomberg.com/news/articles/2015-01-25/death-threats-dawn-raids-kindled-by-china-anti-corruption-drive96http://sdinotice.hkex.com.hk/di/NSForm1.aspx?fn=68077&sa2=np&scpid=222932197See next page.


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II.III Related Party Transaction 3: MOVA License

On February 20th2015, Shenzhenshi Haitiecheng Science And Technology Co Ltd (SHST), filed a

legal complaint against several parties including Rearden LLC (Rearden) over the ownership of

MOVA98. Reardensprincipal is Steve Perlman, one of the inventors of MOVA.

MOVA is a facial motion capture system principally used in the production of visual effects.

99

The MOVA system in action

Although we will not get into the details of the legal dispute here, the letter from SHST makes one

thing very clear: SHST believes it is the only owner of the rights to the MOVA technologysince it

acquired the rights to MOVA in May 2013 (shortly after Digital Domain Holdings first announced its

intention to purchase a 70% stake in Digital Domain 3.0 from Beijing Galloping Horse).

In the complaint to Rearden, SHST claims it has licensed its MOVA technology to a U.S.-based

entity:

98

http://www2.bloomberglaw.com/public/desktop/document/Shenzhenshi_Haitiecheng_Science_and_Technol

ogy_Co_Ltd_v_Rearden_L99Image credit: Fxguide: https://www.fxguide.com/featured/sci-tech-winners-ucap-mova/


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We know this particular U.S.-based entity to be Digital Domain 3.0. MOVA is a technology primarily

used by Digital Domain 3.0, which has used MOVA for facial capture on Pixels, Avengers Age of

Ultron, Terminator Genisys, Night at the Museum 3 and Guardians of the Galaxy100.

The reason for SHSTs complaint are comments made by Reardens founder Steve Perlman, who

stated to the Hollywood Reporter that Digital Domain did not have the proper license to use MOVA

on Guardians of the Galaxy101. The following is an outtake from said Hollywood Reporter article:

When the MOVA technology was honored with an Academy Award, Digital Domain Holdings put

out a press release titled: Digital Domains Exclusive visual effects technology MOVA 102,

indicating that Digital Domain has an exclusive license to the MOVA technology. We believe a

licensing agreement between Digital Domain and SHST would be problematic due to the

ownership structure of SHST, which we have outlined on the basis of Guangdong Enterprise Credit

System and Hong Kong Exchange filings:

100http://www.cgmeetup.net/home/jobs/digital-domain-recruiting-mova-facial-data-processor-3/101

http://www.hollywoodreporter.com/behind-screen/oscars-scitech-awards-hit-by-770501102http://en.acnnewswire.com/press-release/english/19853/digital-domain's-exclusive-visual-effects-

technology-mova-and-drop-honored-with-scientific-and-technical-achievement-awards-in-the-87th-academy-

awards


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103

103Sources for schematic:

http://gsxt.gdgs.gov.cn/

http://www.hkexnews.hk/di/di.htm

Xiao Ping, Zhou Fulin, Zhou Jian, Zhang Xiaoqun

Percentages refer to last known shareholding at 8 May 2013.


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As is visible in the schematic, SHST is majority owned by Shenzhen Worthope Investment

Development104which in turn is 70% owned by Digital Domain Holdings then- Chairman Zhou Jian.

Effectively, Zhou Jian controls SHST. At the time Digital Domain licensed MOVA from SHST,

Zhou Jian was the chairman of Digital Domain Holdings.

All the other parties with an interest in SHST were all employed by multiple firms linked to Ever

Union. In total, the BVI investment vehicles of SHSTs owners are believed to control an absolute

majority of the Digital Domain Holdings outstanding shares, although Progress Mind Investment and

Trendy Base no longer have to disclose their holdings.

Either way, Digital Domain Holdings licensing agreement with SHST constitutes to a continuing

connected transactionbetween the Company and an entity related to multiple connected parties of

the Company. Digital Domain Holdings has not publicly announced or commented on its agreement

with SHST, and has not sought shareholder approval for the continuing connected transaction.

We believe Digital Domain Holdings has kept everybody in the dark for good reason:

An overview of Shenzhen-based companies related to Digital Domain Holdings shows that SHST is

registered to the same phone number as the phantom companies Shenzhen Tuohe, Shenzhen Xince

and Shenzhen Xinhe105.

Additionally, Shenzhen Worthope Investment Development (which controls SHST) is registered to

the same offices as the aforementioned phantom companies. This goes to show that Shenzhen

Worthope, much like Shenzhen Xince, is likely to exist only on paper.

Data from the Guangdong Enterprise Credit system shows that Shenzhen Worthope Investment held a

significant stake in Dinghe Venture Capital, which makes it likely to be one of the companies in the

web of shell companies that the New York Times referred to in its article detailing how Che Feng

and his associates exercised control over Dinghe Venture Capital. SHST itself held a large stake in

Shenzhen Xince, which it later transferred to an @euamc.com registered shell company.

Digital Domain Holdings has not sought shareholder approval for its dealings with SHST. This further

corroborates with the rest of our findings indicating that Digital Domain Holdings does not seem to be

interested in properly disclosing relevant facts to its public investors. Meanwhile, SHSTsdeep ties to

dubious companies such as Shenzhen Worthope and Shenzhen Xince raise even more questions about

Digital Domain Holdingsrelations to the mysterious group of Shenzhen-based phantom companies.

104Worthope as in Beijing Worthope Sathen Network Technology, Beijing Worthope Technology Development, etc.

Is anybody still surprised at this point?105This overview shows the addresses at the time of the Shenzhen Tuohe agreement. Guangdong Enterprise Credit System

filings show that the companies registered to the Hanglu Building have since moved, but still share office space with one

another.


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II.IV Related-Party Transaction 4: Yibong Limited

On December 30th2014, Digital Domain Holdings announced it would acquire Yibong Limited from

Virtue State Investments Limited for HK$312,500,000 (~US$40,625,000)106.

The proposed acquisition of Yibong Limited is structured in a fashion near-identical to DigitalDomain Holdings acquisition of Upfield Sky Limited: Digital Domain Holdings would settle the

entire consideration for the acquisition by issuing zero-interest convertible debt to the Vendor.

The vendor, a British-Virgin-Islands shell company named Virtue State Investments, had signed a

letter of intent to acquire 51% of Beijing Carina International E-Commerce Co Ltd (Carina

International), a company that sells face masks branded Carina, after the Chinese movie-star Carina

Lau, who is one of the directors of Carina International.

Virtue State Investments would acquire the stake in Carina International through its wholly-owned

subsidiary Yibong Limited and subsequently dispose of Yibong Limited (whose sole asset would be a

51% stake in Carina International) in a sale to Digital Domain Holdings.

Digital Domain Holdings in its announcement stated that the acquisition of a controlling stake in

Carina International can allow the Group to expand its trading operations to include skin care

products. Read: Digital Domain Holdings intended to expand its scrap metal trading business to

include skin care products.

The proposed business combination: CarinaInternationalsbeauty masks & scrap metal.

At the time that Digital Domain Holdings signed the MOU regarding the acquisition, Virtue State

Investments had yet to acquire its stake in Carina International from its owner, a mainland company

named Beijing Sheng Yun E-Commerce Co Ltd (Beijing Sheng Yun).

This makes that Virtue State Investments is merely a British-Virgin-Islands shell functioning as an

intermediary for a transaction between Digital Domain Holdings and Beijing Sheng Yun. As such, it

is relevant to check Digital Domain Holdingsties to Beijing Sheng Yun, even though the company is

technically not a direct counterparty to Digital Domain Holdings. Based on data from the Beijing

Enterprise Credit System, the ownership structure of Beijing Sheng Yun can be outlined as follows:

106 http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1231/LTN20141231115.pdf


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107

107Sources for schematic are identical

to those of the Shenzhen Tuohe

schematic with the addition of:



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The owners of Beijing Sheng Yun E-Commerce are the very same @euamc.com shell companies

that exercise control over Digital Domain Holdings earlier acquisition target, Shenzhen Tuohe

Investment Development108. In effect, Digital Domain Holdings once again attempted to purchase

assets from a mainland Chinese company controlled by Che Fengs Beijing Ever Union Asset

Management. Further corroborating this thesis is the fact that Beijing Ever Union AssetManagementsJia Yue is appointed directly to the board of Beijing Sheng Yun109.

At this point, need we even continue?

This intended transaction once again confirms our thesis that Digital Domain Holdings, despite

denying its ties to Che Feng, systematically entered into deals with entities controlled by Che Fengs

Ever Union.

Digital Domain CEO Daniel Seah announced in the month after Che Fengs arrest that Digital

Domain Holdings and Virtue State Investments had agreed to terminate the intended transaction110.

108Beijing Hongwei Xuantai and Beijing Liqui Fangzhou were the owners of Beijing Sheng Yun at the time

Digital Domain Holdings signed the MOU regarding the acquisition of Yibong Limited. The two firms have

since transferred ownership of Beijing Sheng Yun to two newly established shell companies, both of which

are partially controlled by Xiao Ping (who served as the general manager of SHST and as director of

Shenzhen Xince Investment Development).109Beijing Worthope Technology Development is registered to [email protected], we believe Beijing

Sheng Yuns Jia Yue to be the owner of this email address.110 http://www.hkexnews.hk/listedco/listconews/SEHK/2015/0730/LTN20150730688.pdf


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II.V Related-Party Transactions: Conclusion

Having analyzed Digital Domain Holdings acquisitions, it seems to be clear beyond a doubt that

Digital Domain Holdings systematically engaged in transactions with shell companies linked to the

executives of Che Fengs Ever Union. All of that happened while Che Fengs associates controlled an

absolute majority of Digital Domain Holdings shares, and while Ches associates controlled amajority of the director votes.

Currently, Digital Domain Holdings executives deny that the companies has ties to Che Feng. When

interviewed by the Taiwanese business magazine Commonwealth, Digital Domain Holdings

executives are quoted as saying111:

The fact that this Chinese princeling[Che Feng] has been thrown in jail does not mean that

he has ties with Digital Domain.

Although we agree that the two facts are not directly related, it does seem abundantly clear at this

point that this particular Chinese princeling is undeniably deeply connected with Digital DomainHoldings. However, the companys executives seem to remain in denial about this fact.

The line of defense employed here is an exact copy of that of Digital DomainHoldingsinvestor GuoWengui, who defended his ties to the disgraced Communist party official Ma Jian as follows112:

He [Guo Wengui] stressed that even if Ma was convicted of corruption, it did not mean that

he had been involved in any of Ma's wrongdoings.

Today, Guo Wengui is amongst Chinas most wanted after being implicated in Ma Jians

wrongdoings.

Digital Domain Holdings chairman, former HTC-CEO Peter Chou, when asked by Commonwealth

about the integration of corrupt capital in Digital Domain Holdings, said113:

When you look at the company you look at its strategy, values, profits, and direction. We are

100% in control, there is no interference whatsoever. Presently the company structure, the

director votes are all in our hands. People are being too sensitive

We can come to no other conclusion that Peter Chous statements are false.

What has Digital Domain Holdings strategy been other than purchasing assets from companies

controlled by Ever Union? Who has supplied financing to Digital Domain Holdings but Ever Unionand its associates? What other explanation for Digital Domains Ever Union branded subsidiaries is

there other than that Digital Domain is completely under the control of Ever Union?

Che Fengs interference is visible in nearly every aspect of the company. Furthermore, we would

argue that people are never too sensitive when it comes to corruption. Instead, we believe that Peter

Chou is too ignorant to see and acknowledge the massive integration of corrupt capital in Digital

Domain Holdings and the nefarious interference it has brought along with it.

111

http://english.cw.com.tw/article.do?action=show&id=14987&offset=1112http://www.scmp.com/news/china/article/1751968/chinese-tycoon-denies-colluding-disgraced-senior-spy-

ma-jian113http://english.cw.com.tw/article.do?action=show&id=14987&offset=6


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III. DDHLS BUSINESS: QUESTIONABLE SUBSIDIARIES

III.I Ever Union Services Development Limited

Ever Union Services Development Limited is a Hong-Kong based subsidiary of Digital Domain

Holdings known earlier as Ever Union Medical Services Limited (not to be confused with Ever UnionMedical Services Group Limited, the DDHL subsidiary which would purchase Shenzhen Tuohe).

Ever Union Services Development Limited received its current name on February 16th2012.

On March 30th of 2012, Ever Union Services Development established a representative office in

Beijing, filings with the Beijing Enterprise Credit System show114.

The address of the representative office?

13thFloor, B Building, 21stCentury Plaza, No. 40, Liang Ma Qiao Road.

The address of Che Fengs Beijing Ever Union Asset Management?

13thFloor, B Building, 21stCentury Plaza, No. 40, Liang Ma Qiao Road115.

The purpose of Ever Union Services Development or its representative offices in Beijing has not been

disclosed by Digital Domain Holdings. If Digital Domain Holdings has no ties to Che Feng, why is

a dubious Digital Domain Holdings subsidiary registered to the exact same address as Che

Fengs most prominent investment vehicle?

III.II Sino Front Investments Limited

Less than one month after the completion of the placement and subscription of convertible debt in

2009 which gave Che Fengs associates absolute control over Digital Domain Holdings, the company

established Sino Front Investments Limited, a Hong-Kong based company116.

Digital Domain Holdings listed the purpose of the firm as a Securities Investment and InvestmentHolding Company117.

Sino Front Investments repeatedly filed for and received a commercial money-lenders license118.

DDHL however has never seemed to recognize any revenue from money-lending activities119, which

may be explained by the fact that Sino Front was only registered to conduct lending activities from the

18thfloor of an office building, has no website, no phone number and no retail presence. How can a

legitimate money lending firm do business without being accessible to consumers?

On April 30th, 2014, Digital Domain Holdings sold Sino Front Investment for HK$560,000 to an

undisclosed party believed to be from Beijing120. Why did Digital Domain Holdings operate a

money lending business for years on end without recognizing revenue from money lending?

114http://qyxy.baic.gov.cn/ searched for: 115http://qyxy.baic.gov.cn/ searched for: 116https://www.hkgbusiness.com/en/company/Sino-Front-Investments-Limited117DDHL 2009 Annual Report, p.72118 http://www.gld.gov.hk/egazette/pdf/20111548/egn20

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