A New Jersey-based consultant who helped Chinese firms become listed on U.S. exchanges stole money raised for a client and manipulated stock-trading data to artificially reach the number of shareholders a company needed to go public, U.S. regulators said.
Huakang “David” Zhou and his consulting firm Warner Technology and Investment Corp. located more than 20 private companies in China from at least 2007 to 2010 to bring public in the U.S. through so-called reverse mergers, the Securities and Exchange Commission said in a lawsuit filed today at federal court in Manhattan. Several of the firms have since failed, including at least one that collapsed amid fraud allegations, the SEC said.
The lawsuit, which accuses Zhou of using the stolen money to pay his son’s mortgage, marks the latest move in a broader SEC probe targeting the financial statements of firms based in China that have listed their shares on U.S. exchanges. The SEC, which has deregistered the securities of almost 50 companies and filed fraud cases against more than 40 issuers and executives as part of the investigation, has also targeted auditors who have refused to turn over documents, citing Chinese law.
“Zhou and his firm sought to take advantage of our financial markets by propping up some Chinese issuers with the sole purpose of enriching themselves at the expense of U.S. investors,” Andrew Calamari, head of the SEC’s regional office in New York, said in a statement.
Many of them entered U.S. capital markets through reverse mergers, in which a closely held firm buys a shell company already public on an exchange, allowing them to list shares without the scrutiny of a public offering. Zhou’s firm advertises itself as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger, the SEC said.
Robert Brantl, Zhou’s attorney, declined to comment.