On November 30, 2012, the Securities Exchange Commission announced that it has filed a complaint in the Southern District of New York against China North East Petroleum Holdings Limited (“CNEP”) and a number of its current and former directors and officers (Securities and Exchange Commission v. China North East Petroleum Holdings Limited, et al., Civil Action No. 12-CV-8696 (S.D.N.Y.)).  CNEP is a Nevada corporation with principal executive offices in New York and oil drilling operations in China.  CNEP was formed as a result of a reverse merger in 2004.  The complaint alleges fraud and other related charges to recover company monies that were improperly received.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains, and civil penalties from each Defendant.

The Commission alleges that CNEP engaged in fraudulent conduct in connection with over 176 related-party transactions.  The Commission also “alleges that, in connection with its two public stock offerings in late 2009, CNEP falsely stated to investors in a registration statement and other public filings . . . that the offering proceeds would be used to fund future business expansion and for general working capital purposes”, but that portions of the offering proceeds were diverted as part of the related-party transactions at issue.  The Commission alleges that “these transactions totaled approximately $59 million of related-party activity during 2009”, which were not fully disclosed to the investing public.

Previously, on March 15, 2012, New York Stock Exchange Regulation announced that on March 1, 2012 a trading halt was initiated for CNEP in connection with an Order of Suspension of Trading issued by the S.E.C.  In a news release dated July 6, 2012, the New York Stock Exchange announced its final determination to remove CNEP from listing.

As our regular readers will recall, reverse mergers involving Chinese companies was a subject of discussion at this year’s PLUS D&O Symposium.  If you would like to take a look at our coverage on the issue, please click on the following link: PLUS D&O Symposium 2012 -- Day 1 First Panel: Latest Trends in Securities Litigation and Dodd-Frank.