Dhruv V Singh
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SHANGHAI American regulators charged two Chinese executives on Wednesday with defrauding investors of hundreds of millions of dollars by stealing and selling the assets of a coal mining company in China whose stock trades in the United States.
In its lawsuit, the Securities and Exchange Commission accused Zhao Ming, the chairman of Puda Coal, and Zhu Liping, the former chief executive, of failing to disclose a 2009 transaction that transferred the companys only revenue-producing asset, Shanxi Puda Coal, to the chairman, and then on to a fund controlled by a Chinese state-owned company. The deal, the S.E.C. said, allowed the chairman to reap a huge profit.
After the transfer, Puda Coal became nothing more than a shell company, according to the S.E.C. Federal authorities say the company continued to raise money from United States investors, saying the money would be used to acquire additional coal assets in China.
Zhao and Zhu duped investors with promises that their money would be invested in a Chinese coal company when in fact the company was an empty shell that had been looted by the defendants, said Robert Khuzami, director of the S.E.C.s division of enforcement. This enforcement action reflects our continuing commitment to hold accountable officers and directors of issuers who misuse their access to the U.S. capital markets to commit fraud for personal gain.
The case unfolded after a prominent short-seller accused the company of engaging in fraudulent transactions. Soon after, the company issued a statement saying there could be some validity to the claims. The companys auditor resigned in July, and the S.E.C. suspended trading in Puda Coal last year.
The Puda Coal case is part of a growing pattern.
For the last two years, federal regulators have investigated fraud accusations involving dozens of Chinese companies that came to the United States through what is called a reverse merger, or back door listing. The tactic allows companies to avoid the high costs and regulatory scrutiny associated with an initial public offering. Hoping to ride Chinas growth trend, United States investors clamored to buy shares of such companies.
But in the last year, dozens of reverse mergers have been investigated on suspicion of accounting fraud and the filing of false and misleading statements. The cases have wiped out billions of dollars of market value.
A Florida investor is suing Paulson & Company, claiming the large hedge fund firm did not conduct proper due diligence when analyzing the investment in Sino-Forest, a Chinese timber company. Paulson lost about $500 million on Sino-Forest, after an analyst likened the company to a Ponzi scheme.
The S.E.C. says it is working with regulators in China and elsewhere to ensure that investors are protected. Regulators are also investigating the lawyers, accountants and consultants who helped Chinese companies list in the United States.
The agency has charged only a handful of Chinese-based executives in recent years, and legal experts say it is unclear whether the S.E.C. or other American regulators will be able to punish Chinese citizens. Chinese authorities are reluctant to give American law enforcement officers jurisdiction.
In the Puda case, investigators say that Mr. Zhao transferred 90 percent of Shanxi Puda Coal to himself in late 2009. Then in July 2010, he passed 49 percent to Citic Trust, a private equity fund controlled by the Citic Group, one of Chinas biggest financial institutions. Mr. Zhao pledged the other 51 percent as collateral in exchange for a loan from Citic.
The executives did not get approval from the board to make the transfer and never disclosed it in S.E.C. filings, according to federal regulators. When the S.E.C. investigated the transfer, Mr. Zhu, the chief executive, provided a misleading letter to the S.E.C. purporting to be from Citic Trust, investigators say. The S.E.C. says Mr. Zhu later admitted to forging the letter and resigned shortly thereafter.
S.E.C. Charges 2 Chinese Executives With Fraud - NYTimes.com
In its lawsuit, the Securities and Exchange Commission accused Zhao Ming, the chairman of Puda Coal, and Zhu Liping, the former chief executive, of failing to disclose a 2009 transaction that transferred the companys only revenue-producing asset, Shanxi Puda Coal, to the chairman, and then on to a fund controlled by a Chinese state-owned company. The deal, the S.E.C. said, allowed the chairman to reap a huge profit.
After the transfer, Puda Coal became nothing more than a shell company, according to the S.E.C. Federal authorities say the company continued to raise money from United States investors, saying the money would be used to acquire additional coal assets in China.
Zhao and Zhu duped investors with promises that their money would be invested in a Chinese coal company when in fact the company was an empty shell that had been looted by the defendants, said Robert Khuzami, director of the S.E.C.s division of enforcement. This enforcement action reflects our continuing commitment to hold accountable officers and directors of issuers who misuse their access to the U.S. capital markets to commit fraud for personal gain.
The case unfolded after a prominent short-seller accused the company of engaging in fraudulent transactions. Soon after, the company issued a statement saying there could be some validity to the claims. The companys auditor resigned in July, and the S.E.C. suspended trading in Puda Coal last year.
The Puda Coal case is part of a growing pattern.
For the last two years, federal regulators have investigated fraud accusations involving dozens of Chinese companies that came to the United States through what is called a reverse merger, or back door listing. The tactic allows companies to avoid the high costs and regulatory scrutiny associated with an initial public offering. Hoping to ride Chinas growth trend, United States investors clamored to buy shares of such companies.
But in the last year, dozens of reverse mergers have been investigated on suspicion of accounting fraud and the filing of false and misleading statements. The cases have wiped out billions of dollars of market value.
A Florida investor is suing Paulson & Company, claiming the large hedge fund firm did not conduct proper due diligence when analyzing the investment in Sino-Forest, a Chinese timber company. Paulson lost about $500 million on Sino-Forest, after an analyst likened the company to a Ponzi scheme.
The S.E.C. says it is working with regulators in China and elsewhere to ensure that investors are protected. Regulators are also investigating the lawyers, accountants and consultants who helped Chinese companies list in the United States.
The agency has charged only a handful of Chinese-based executives in recent years, and legal experts say it is unclear whether the S.E.C. or other American regulators will be able to punish Chinese citizens. Chinese authorities are reluctant to give American law enforcement officers jurisdiction.
In the Puda case, investigators say that Mr. Zhao transferred 90 percent of Shanxi Puda Coal to himself in late 2009. Then in July 2010, he passed 49 percent to Citic Trust, a private equity fund controlled by the Citic Group, one of Chinas biggest financial institutions. Mr. Zhao pledged the other 51 percent as collateral in exchange for a loan from Citic.
The executives did not get approval from the board to make the transfer and never disclosed it in S.E.C. filings, according to federal regulators. When the S.E.C. investigated the transfer, Mr. Zhu, the chief executive, provided a misleading letter to the S.E.C. purporting to be from Citic Trust, investigators say. The S.E.C. says Mr. Zhu later admitted to forging the letter and resigned shortly thereafter.
S.E.C. Charges 2 Chinese Executives With Fraud - NYTimes.com
