Source: Investor buys Feng Ping tools and equipment

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Steve Toloken James Fiocchi, managing director of Feng Ping Tooling & Plastics Mfg. Co. Ltd.

DONGGUAN, CHINA (Updated) — Feng Ping Tooling & Plastics Mfg. Co. Ltd., at one time a fast-growing mold making shop in southern China started by two brothers from Chicago, abruptly closed Dec. 16 and filed for bankruptcy.

Feng Ping's story, however, is a little more dramatic than most bankruptcies.

For starters, there are allegations of 19 employees embezzling $4.5 million to start a competing company.

As well, vendors blockaded its factory campus for more than a month beginning in November, worried they wouldn't be able to collect several million U.S. dollars they were owed.

In addition, more than 200 workers refused to leave their factory dormitories after the bankruptcy. Several dozen of them were arrested in a protest in Dongguan on Dec. 23 after they tried to block traffic outside a local Wal-Mart to draw attention to what they called an unfair wage settlement.

Feng Ping is now headed toward liquidating the factory to pay debts to its landlord and suppliers. But that process is also raising questions about the fate of some of the molds ordered by its customers in the United States and Europe.

One source suggested those questions could be answered soon, with reports that the molds and equipment had been bought by an outside investor that specializes in bankruptcies. Negotiations were reportedly underway with the owners of the molds to buy their molds out of the bankruptcy process, the source said.

It would be the latest turn in a complex case. In one particularly dramatic twist that reads like it's from the pages of a spy novel, Feng Ping said the blockading vendors at the plant had followed the American owners, James and John Fiocchi, and effectively prevented them from leaving for 13 days, until they made a nighttime escape in the trunk of a car.

The bankruptcy left several hundred molds belonging to Feng Ping customers apparently trapped in the factory. Feng Ping executives said they had removed several hundred molds owned by the company and customers.

In a Dec. 16 letter to customers, Feng Ping conceded that it was unable to remove more molds.

"[Due] to the current situation… there is NO [emphasis by Feng Ping] authorized representative at Feng Ping Tooling at this time that can guarantee transfer or return partially built molds," the company said. "Customers working with ex-employees to retrieve unfinished or finished tools, do so at their own risk. We are told the court will eventually appoint someone to do this."

"It is with regret and sadness that we must inform our customers that Feng Ping Tooling & Plastics Mfg. Co. Ltd. has filed for bankruptcy with the PRC Court of Dongguan, China," it said. "Effective Dec. 16, 2013, Feng Ping Tooling & Plastics Mfg. Co. Ltd. is closed for business."

Feng Ping's letter to customers provides a detailed timeline of a situation that seemed to spin out of control in November.

It alleges that from August 2012 to July 2013, a top manager and 18 other employees executed a plan to embezzle an estimated $4.575 million from Feng Ping. The plan involved 33 vendors, Feng Ping alleged in the letter.

When the alleged embezzlement was discovered in July, the employees were fired, according to the letter.

Feng Ping Managing Director James Fiocchi said the company contacted police: "We reported it to the police and they said they didn't care."

Some workers interviewed Dec. 20 and Dec. 22 by Plastics News at the Feng Ping factory, however, suggested there were additional problems beyond the alleged $4.5 million embezzlement.

They said the company apparently spent sizable sums renting more manufacturing space for a smartphone related project that didn't take off. And they suggested company managers were inattentive to other problems.

"They, the bosses, should feel some responsibility," one employee said. "As far as we know they pay no attention to some things, and people are stealing some things from our company, like the copper and steel and so on. They pay no attention to it."

Fiocchi confirmed that the company had to fire another top manager for fraud more than a year ago, because the manager paid 25 cents per pound above market price for Feng Ping's copper wire, and then pocketed the difference.

Feng Ping alleged in its letter that the employees involved in the $4.5 million embezzlement used the money to open a competing mold shop in September and solicit Feng Ping customers. That allegedly included recruiting 12 people still at Feng Ping to feed them quotations and confidential customer information.

After it discovered the embezzlement, Feng Ping said it began a recovery plan, downsizing by 50 percent and laying off workers to make payments to vendors.

But, according to the company, by Nov. 1, Feng Ping's vendors were becoming uneasy, and "threaten[ed] the lives" of several top people who remained at the company, including the new factory manager.

By Nov. 15, Feng Ping decided to sell $2 million worth of equipment to pay down vendor debt. But that did not calm the situation.

"The moment the first piece of equipment was to be sold, more vendors blocked the gates with big trucks because they did not think we would use the money to pay them," the company said.

By Nov. 18, "nothing [could] get in or out," the company said in the Dec. 16 letter. "The equipment can't be sold to pay them so there is a stalemate that exists to this day."

Feng Ping execs described strained situations with vendors: Wang Hao Bin, who took over as factory manager in July, said the vendors would follow the American owners during exercise hikes in the hills around the factory, which left the Americans feeling intimidated.

And Fiocchi said vendors would sometimes wait for him outside an authentic American-style tavern that the company built at the Feng Ping campus.

Wang said the police declined to intervene in the situation with vendors: "The police said this is an economic dispute and they cannot interfere."

Vendors, however, insisted they did not threaten anyone, saying only that they were worried about recovering their debts.

"All the Americans' safety and property can be assured," said a representative of a mold steel supplier from Hubei province, who said he had been outside the Feng Ping factory for one month.

James Fiocchi said Chinese authorities said his brother John faced potential jail time over unpaid staff wages, before the two men left for the United States.

Beyond the vendors, the situation with workers was also unpredictable, after more than 200 of them refused to leave the factory without getting back wages.

For the Feng Ping employees, the key issue is getting their six weeks of back pay plus one month of severance pay they believe they should receive under Chinese law for each year they've worked at the company.

But the offer from the liquidation committee, which consists of representatives of the company, the government and the landlord, was only to pay the back wages, which they argue is all that Chinese law requires in liquidation.

The workers began their protest after they received a settlement offer on Dec. 23 that included back pay but not severance, one worker said. They walked as a large group to the local government offices to ask for help and then tried to block the road in front of the Wal-Mart.

More than 40 workers were taken away by police, the worker said. Another source familiar with the situation confirmed that about 40 workers were arrested.

The worker added that it seemed that in the end, most of the workers remaining in the factory would accept the offer of back pay without severance.

Workers also said the timing of the closure meant they would not get their annual Chinese New Year bonus, which typically is one or two month's salary. The Chinese New Year will be in late January.

The workers also said that as the factory's situation worsened, some of them had taken pay cuts of between 400 and 800 Chinese yuan per month beginning in August and September, out of salaries that average about 3,000 yuan ($490) a month.

Workers interviewed at the factory said they were also angry about a statement in Feng Ping's Dec. 16 letter that accused many of them of looting the factory. Feng Ping's letter said that on Dec. 15, "270 workers loot the Feng Ping factory and take out everything they can carry."

But several workers said that mid-level management removed computers and other equipment, and pointedly insisted in interviews that rank-and-file workers did not loot or steal.

Fiocchi seemed to back away from that part of the Dec. 16 letter, saying that he learned a few days after the letter that it was mid-level managers who removed computers, televisions and other items from Feng Ping, and not the vast majority of workers: "The lower level workers did not take a damn thing."

Feng Ping's bankruptcy has set off a scramble to get access to the molds, with one competitor of Feng Ping, Jade Group International LLC, based in Zhongshan, China, issuing a blanket email through a trade association in the United States offering to help companies secure molds stuck in the Feng Ping factory.

But that prompted a retort from Fiocchi, who said that it would drive up the cost of recovering molds and urged companies to allow the process to play out. Jade President Patrick Smith declined to comment.

Until the troubles, the Feng Ping had seemed to enjoy a quick rise. Although it only started in 2008, the company had grown to several hundred employees. It adopted a high profile, with the brothers giving frequent interviews to trade press, including Plastics News.

They took a large booth at the NPE 2012 show in Orlando, Fla., hosted visits from U.S. government officials, and also garnered write-ups in Bloomberg News and a mention in a story in the Chicago Tribune.