Officials of Chinese Company Traded in the United States Charged with Siphoning Funds, Defrauding Investors

Officials of Chinese Company Traded in the United States Charged with Siphoning Funds, Defrauding Investors

Ming Zhao, Chairman of Puda Coal, Inc. and Liping Zhu, its former CEO, were charged by the Securities and Exchange Commission with securities fraud for the theft of the company’s primary operating asset – its subsidiary, Shanxi Puda Coal Group Co. Ltd.

According to the SEC complaint, Puda held an indirect 90 percent stake in a lucrative coal mining subsidiary, Shanxi Puda Coal Group Co Ltd, which was also its sole operating asset. In September 2009, Zhao and Zhu conspired to fraudulently transfer this stake to Zhao himself.  Shortly thereafter, the local government of the Shanxi Province selected Puda’s Shanxi subsidiary to be a local consolidator of smaller coal mining companies, a very lucrative opportunity.

Zhao transferred a 49 percent stake in Shanxi Coal to CITIC Trust Co. Ltd., a private equity fund owned by the CITIC Group, a Chinese state-owned investment firm.  CITIC placed the shares in a trust and Zhao received 1.212 billion preferred shares in the trust in exchange.  CITIC thereupon sold portions of the trust to various Chinese investors.

Zhao then pledged his remaining 51 percent in Shanxi Coal to CITIC and obtained a loan in favor of Shanxi Coal of RMB 3.5 billion, according to the complaint.

These transfers of its subsidiary were approved by neither Puda’s board of directors nor its shareholders, charged the SEC.  What is more, Puda made two public offerings in the U.S. in 2010 without disclosing that it no longer owned Shanxi Coal, its main operating asset and revenue source.  Puda thereafter also made numerous SEC filings including its consolidated accounts which included Shanxi Coal, all of which were therefore false.

These irregularities became the subject of an internet report on April 8, 2011, which caused a dramatic fall in the price of the shares of Puda on the American exchanges.  Three days later Puda announced that its audit committee had engaged outside counsel to conduct an investigation, and admitted to irregular transfers of subsidiary ownership.

Zhao and Zhu then forged a letter, purported to be from CITIC, that said that it had no ownership interest in Shanxi Coal and had not advanced any monies to Shanxi Coal as a loan.  This letter was produced to the SEC and to Puda’s audit committee, but was later exposed as a forgery when CITIC denied issuing it.  Zhu owned public responsibility for the forgery and resigned – however, Zhao remains as chairman of Puda.

Zhu and Zhao are charged under various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  In its civil injunctive action the SEC has sought a final judgment that bars the defendants from continued violation of the provisions, disgorgement of fraud profits, prejudgment interest, financial penalties and a bar on acting as directors or officers of public companies.

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