Xinhua Finance Inc.’s former chief executive officer, Loretta Fredy Bush, denies that she was part of a $50 million insider-trading scheme that defrauded investors and U.S. regulators, her lawyer said.
Bush, along with former Xinhua Finance board members Shelly Singhal and Dennis Pelino, were charged May 10 in federal court in Washington with conspiracy, mail fraud and false statements. Shanghai-based Xinhua Finance, the first Chinese company listed on the Tokyo stock exchange, provides information products focused on Chinese and international financial markets.
The three are accused of using entities to disguise the sale of shares in Shanghai-based Xinhua Finance from the Securities and Exchange Commission and investors and engage in insider trading, according to an indictment. They are also accused of manipulating the company’s balance sheet to avoid impairment charges.
“The allegations regarding Ms. Bush are characterizations of legitimate business transactions by disgraced lawyers who have pleaded guilty to lying to prosecutors about other matters and now are trying to curry favor with these prosecutors,” Bush’s lawyer, Charles Leeper of Drinker Biddle & Reath in Washington, said yesterday in an e-mailed statement.
Pelino denies the charges, claiming that lawful business transactions were “misconstrued” by prosecutors, according to an e-mailed statement from his lawyer, Atlee Wampler, in Miami. It is also unlikely the U.S. has jurisdiction over the China-based company, Wampler said in the statement.
Singhal and Bush face nine charges. Pelino, who was charged with an additional false statements count, faces 10 charges. Each mail fraud count carries a maximum penalty of 20 years in prison.
All three remain free pending arraignment scheduled for May 17.
Xinhua Finance said in statement yesterday that none of the three defendants have worked at the company since January 2009.
“The Company’s current management and board members have no knowledge of the transactions stated in the indictment,” the company said.
Bush, 52, co-founded Xinhua Finance with Pelino in 1999. She was the company’s chief executive officer and vice chairman of its board of directors until January 2009, according to the indictment. She lives in Shanghai, prosecutors said.
Pelino, 63, was chairman of the compensation committee and a member of the audit and investment committees, according to the indictment, and Singhal, 43, was chairman of Xinhua Finance’s audit committee and a member of its compensation and investment committees.
The scheme allegedly began in January 2004 when Singhal and Pelino “induced” the owner of a New York-based company to sell a warrant to buy preferred Xinhua Finance shares. The New York company was told by Xinhua Finance that it had defaulted on the warrant and demanded a $3 million payment, prosecutors said. Singhal and Pelino called the owner and said they had found an investor to buy the warrant, according to the indictment.
Using a middleman and a fictitious entity, Singhal and Pelino allegedly bought the warrant. The two are accused of then using the warrant to purchase restricted Xinhua Finance shares, which were deposited in a brokerage account in the name of Entree Capital. The account was controlled by Singhal and used by Singhal and Pelino to disguise their involvement, prosecutors said.
In March 2005, Bush authorized an acceleration of the so-called lock-up period of the shares held by Entree Capital, meaning the brokerage account could begin selling its Xinhua Finance shares about four weeks before other investors, the indictment alleges.
At Singhal’s direction, Entree Capital allegedly sold off some of its Xinhua Finance shares, valued at $16.6 million, during the lock-up period. The deal netted $10.1 million for Singhal, $5.8 million for Pelino and $2.3 million for Bush, the indictment alleges.
In 2006, Bush violated her company’s insider trading policy by selling more than $15 million worth of Xinhua Finance shares during a “blackout period” through Bedrock Securities LLC, a broker-dealer company controlled by Singhal, according to the indictment.
When the National Association of Securities Dealers opened an investigation into Bedrock, Singhal ordered the sales agreements to be backdated and changed in order to give the appearance that Bush pledged the shares to Bedford Proprietary Trading LLC in order to secure a loan, the indictment alleges. Bedford was another company controlled by Singhal, the government alleges.
From January 2006 through May 2008, Bush and Pelino sold more than $25 million worth of Xinhua Finance shares through Bedrock Securities and Bedford, the indictment charges.
Singhal and Bush also illegally profited by setting up commission deals between companies Singhal controlled and Xinhua Finance for arranging transactions, according to prosecutors. From April 2006 through January 2007, Bush made $1.8 million and Singhal was paid $5.5 million from the arrangement, the indictment alleges.
Singhal’s lawyers, Barbara Van Gelder and Mark Srere in Washington, didn’t immediately return telephone messages seeking comment.
This is the second criminal case against Singhal. He was indicted last year in Washington and is accused of a running a $10 million stock manipulation conspiracy. Three lawyers have pleaded guilty in that case and agreed to cooperate.
The case is U.S. v. Singhal, 11-cr-00142, U.S. District Court, District of Columbia (Washington).