SEC Sues China-based Executives Over Theft of Company Assets

Puda Coal Inc. (PUDA)’s chairman cheated U.S. investors by secretly transferring control of the company’s sole source of revenue to himself and turning Puda into an empty shell company before selling shares to the public, securities regulators alleged in a lawsuit.

The fraud by Chairman Ming Zhao and former Puda chief executive officer Liping Zhu, who was also sued, caused hundreds of millions of dollars in investor losses after the company’s shares dropped to pennies from a high of almost $17 a share, George Canellos, New York regional director of the U.S. Securities and Exchange Commission, said in a civil complaint filed yesterday in federal court in Manhattan.

The SEC cautioned investors last year about buying stakes in companies that gain listings on U.S. exchanges through so- called reverse mergers, saying they may be prone to fraud.

Zhao, 39, a Chinese national, took over Puda’s 90 percent stake in Chinese coal mining company Shanxi Puda Coal Group Co. Ltd. in September 2009, just weeks before Taiyuan, China-based Puda announced that Shanxi had received a highly lucrative government deal, the complaint says. Zhao later transferred almost half of the coal business to a fund controlled by Citic Group (CITIC), China’s largest state-owned investment firm, the SEC said. The coal business was Puda’s main corporate asset, the agency said.

‘90 Percent Stake’

“At the same time that Citic Trust was effectively selling interests in Shanxi Coal to Chinese investors, the defendants were still telling U.S. investors that Puda owned a 90 percent stake in the company,” Canellos said in the lawsuit.

Zhu, 55, also a Chinese national, knew of the scheme and forged a letter falsely saying Citic claimed no interest in the coal business, according to the complaint. Zhao had his U.S. lawyers give the letter to SEC staff investigating the company. Zhu resigned after the letter was exposed as a forgery.

The transactions weren’t approved by Puda Coal’s board or shareholders and weren’t disclosed in public filings, according to the SEC.

The complaint alleges violations of U.S. securities laws. The SEC is seeking court orders for Zhao and Zhu to disgorge ill-gotten gains and pay unspecified civil fines.

Puda Coal’s common stock was listed and traded on the New York Stock Exchange from September 2009 to August 2011 after entering U.S. capital markets through a reverse merger in July 2005, the SEC said. The SEC has focused recently on China-based companies that list on U.S. exchanges through reverse mergers, in which closely held firms buy shell companies that allow them to sell shares on exchanges without the scrutiny that would surround a public offering.

‘Highlights the Risks’

“It really highlights the risks that are a concern to U.S. regulators about Chinese companies,” said Jacob Frenkel, a former SEC lawyer now with Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “To bring civil charges, even if they cannot service these officials with the lawsuit and bring them into U.S. courts, it still is a strong message.”

Crocker Coulson, an outside investor relations representative for Puda, declined to comment on the SEC suit.

The allegations that Zhao had sold the company’s Chinese operating entity to Citic emerged last April in a report by the anonymous short selling web site Alfred Little, setting off a 51 percent slide in the shares that month.

Ji Feng of Citic Group said the company isn’t immediately able to comment on the SEC case.

“What is really amazing is it’s not involving Chinese entrepreneurs only, it’s involving one of the largest corporations in China,” said Umberto Vitiello, chief executive officer of Milan-based money manager Realty Partners, who estimates he owns about 1 percent of Puda’s shares through a family office.

When allegations first emerged, “I was very surprised and believed it was manipulation, so I didn’t take the chance to sell,” he said. “I would have never imagined that something like that could have ever happened in regulated markets like those in the U.S.”

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Douglas Wong at dwong19@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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