Chinese issuers have been a focus of the Commission as well as the class action bar in recent months. The SEC, for example, has revoked the registration statements of over a dozen Chinese issuers and has another 27 revocation cases pending. One of the largest groups of securities class actions filed last year was cases brought against Chinese issuers that went public through a reverse merger.
Yesterday the Commission brought another enforcement action against a Chinese issuer. The case centered on a Chinese company and its former Chairman and CEO as well as its current CEO. At one time the company owned a valuable coal mine. As part of a fraudulent scheme the coal mine was transferred to another entity in the Peoples Republic of China or PRC following which the PRC and U.S. company simultaneously sold their shares to investors in each country, all of whom thought they were acquiring an interest in the same coal mine. SEC v. Ming Zhao, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012).
The case focuses on Puda Coal, Inc., a Delaware corporation with a principal office in Taiyucan, Shanxi Province, PRC. Its shares were traded on the NYSE from September 2009 through August 2011. The primary asset of the company was Shaux Coal, a coal mining company that was an indirect subsidiary 90% owned by Puda.
On September 28, 2009, Puda announced that Shanxi Coal was one of the entities selected by the Shanxi provincial government to become a coal mining consolidator. This was an extremely lucrative opportunity for the company. Earlier in September, however, Puda’s CEO, defendant Ming Zhao, transferred all of the company’s interest in Shanxi Coal to himself. Subsequently, in July 2010 Mr. Zhao transferred 49% of the coal company to CITIC Trust Co., a Chinese private equity fund. That fund was controlled by CITI Group, the largest state-owned investment firm in the PRC. Mr. Zhao also arranged to have Shanxi Coal pledge 51% of its assets to CITI Trust as collateral for a loan of about $370 million.
During the summer of 2010 CITI Trust sold shares to the Chinese public in a trust which held a 49% interest in Shanxi Coal. In 2010 Puda conducted two public offerings in the United States of shares to raise capital for the operations of Shanxi coal, its supposed sole source of revenue. Those shares were sold to U.S. investors. Chinese investors actually received shares in a trust which owned part of the coal company. U.S. investors received shares in a company which was a shell.
After the Commission’s investigation began defendant Liping Zhu forged a letter supposedly from CITIC Trust which falsely disclaimed any interest in Shanxi Coal. The letter was produced to the staff by U.S. counsel. After it was disclosed in a filing with the Commission, the letter was exposed as a fraud. Mr. Zhu then admitted the forgery and resigned. Mr. Zhao became CEO. The share price of Puda dropped from $17 to a few cents.
The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 12(b)(2)(B), 13(b)-5 and 14(a). The action is pending.