Actions involving Chinese issuers have been a focus of the SEC and the class action bar. The Commission has brought a number of actions involving those issuers, their officers and their auditors. Last month, for example, the agency brought a case against PRC based SinoTechEnergy Ltd and certain of its officers alleging that they mislead investors about the use of the IPO proceeds and falsified the financial statements. SEC v. SinoTechEnergy Ltd., Civil Action No. 2:12-cv-00960 (W.D. La. Filed April 23, 2012). Others, such as SEC v. AutoChina International Ltd., 1:12-CV-01643 (D. Mass. Filed April 11, 2012), involve claims centered on the manipulation of the company’s shares or the misuse of its assets as in SEC v. Ming Zhao, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012). Still others involve efforts by the Commission to obtain audit work papers to investigate the finances of the company. See, e.g., In the Matter of Deloitte Thouche Tohmatsu Certified Public accountants, Ltd., Adm. Proc. File No. 3-14872 (May 9, 2012). A number of actions have sought to revoke the issuer’s registration. See, e.g., In the Matter of Longtop Financial Technologies, Ltd., Adm. Proc. File No. 3-14622 (Filed Nov. 10, 2011)(Initial Decision revoking registration filed Dec. 14, 2011).
The action against China Natural Gas, Inc., and its former Chairman and CEO, Qinan Ji, is another in this line of cases. SEC v. China Natural Gas, Inc., Civil Action No. 12-cv-3824 (Filed May 14, 2012). The company is a Delaware corporation with its headquarters in Xi’an, Shaanxi Province, China. It entered the U.S. capital markets through a reverse merger in 2005. China Natural Gas distributes and sells natural gas through fueling stations. Its shares were suspended by NASDAQ in September 2011 based on the matters in this action. Defendant Qinan Ji served as chairman of the board and was the CEO of the company. He beneficially owns about 14% of the shares of the company while his son has 3.39%.
The case centers on the concealment of two related party transactions involving Mr. Ji and his son and the failure of the company to properly report a material acquisition in a timely manner. In January 2010 China Natural Gas made two short term loans totaling $14.3 million. The transactions were listed in filings made with the Commission as loans to third parties. One for $9.9 million was listed as being extended to Taoxiang Wang. The other, in the amount of $4.4 million, was recorded as having been extended to real estate company Shaanxi Junta Housing Purchase Co. Ltd.
In fact the loans were for the benefit of a real estate company, Xi’an Demaoxing Real Estate Co., Ltd. That company is 90% owned by Mr. Ji’s son. The remaining 10% is owned by his nephew. The purported borrower for one loan, Mr. Wang, was a straw man designed to conceal the true nature of the transaction, according to the complaint. The real estate company listed as the borrower on the other is in fact the business partner of Xi’an and borrowed the money to fund a joint venture between the two companies.
The loans were arranged with the approval of the board of directors and the assistance of the internal audit chief who is the husband of Mr. Ji’s niece. The board was told by Mr. Ji that the loans were made to senior Chinese government officials who were in charge of the company’s natural gas project, not that they were for the benefit of his son’s company. That fabrication was later repeated to the investing public in a conference call. When the board subsequently ordered an internal investigation, Mr. Ji lied to the investigators and also the auditors.
During the fourth quarter of 2008 the China Natural Gas acquired a natural gas company. Mr. Ji approved the transaction without consulting the board of directors. The transaction was not reported timely and properly in the filings for the company. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a). The case is in litigation.