OK, You Steal the Money, I'll Steal the College

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Here is an almost impossibly delightful securities fraud case.

ChinaCast Education Corporation is, or was, "a leading post-secondary education and e-Learning services provider in China" run by Chan Tze Ngon and Jiang Xiangyuan. It went public in the U.S. in 2006 (by means of a merger with a blank check IPO company, always a bad sign), and was listed on Nasdaq, under the symbol CAST, from 2007 until 2012, when it was de-listed for being very very tiny and very very terrible. At its peak, its market capitalization was over $200 million; now it's $4.9 million.

According to the Securities and Exchange Commission, one reason that it got so tiny is that its business model consisted mostly of Chan and Jiang stealing all of its stuff. Which is not a great business model for ChinaCast, though I guess it's fine for Chan and Jiang. On my reading of the SEC complaint, Chan and Jiang seem to have specialized, with Chan in charge of stealing ChinaCast's money and Jiang in charge of stealing its colleges. You might think colleges would be hard to steal but no:

After Chan's management group lost control of the board, Chan and other members of that group, including Jiang, transferred ownership of China Cast's three Traditional Group colleges away from ChinaCast by transferring the ChinaCast-owned holding companies that held the colleges first to Jiang and the dean of one of the colleges and then selling them to other individuals.

So, impressive, but the money-stealing is even better. I can't get over this:

ChinaCast raised a total of$43.8 million in its December 2009 public offering. Chan misappropriated $41 million of the proceeds by transferring the funds from ChinaCast to China Cast Hong Kong, which he secretly controlled, and then moving the bulk of the money to yet another entity outside ChinaCast's corporate structure. Chan directed and engaged in these transactions without seeking or obtaining the approval of ChinaCast's board of directors, and the transactions were not publicly disclosed until ChinaCast's new management caused ChinaCast to file a current report on Form 8-K on December 21, 2012, disclosing, among other things, Chan's misappropriation of the offering proceeds.

One thing that I occasionally did as a capital markets banker was give people wire instructions to get the proceeds of a public securities offering from the buyers of that offering, to the syndicate banks, to the company doing the offering. OBVIOUSLY ONE IS TEMPTED. "Oh just send a check payable to Matthew Levine, I'll take care of it." I assumed this never actually happened, but there you go. Chan Tze Ngon, I like your style.*

Here is more on ChinaCast's badness. Here let's just notice a little oddity of this case, which is that it is really only secondarily securities fraud. It's mostly just theft. Like, ChinaCast had money and colleges, and Chan and Jiang stole them. But the problem facing U.S. regulators is that this is (well, was) a U.S. listed company, with U.S. investors whose stuff was stolen, but it is not illegal in America to steal stuff from Chinese companies in China.

You can see how this would chafe U.S. securities regulators, but fortunately they found an answer, which is that basically any bad thing you can do at a company is securities fraud. Because generally speaking, when you do a bad thing, you also don't disclose it, and Chan and Jiang didn't. Stealing $41 million from your company? Not securities fraud. Signing a 10-K saying that the $41 million is still there? Securities fraud! So we got them.

Jiang went a bit further: He sold some ChinaCast stock between the time that he stole those colleges and the time that the company disclosed that the colleges had gone missing. You know what that is, right? Insider trading! The worst kind of securities fraud.

It's a good lesson in how securities regulators can use disclosure rules to do substantive regulation: You can't get them for doing the bad thing, but you can get them for covering it up, which is just as good. Or just as useless, as the case may be: Chan and Jiang live in China and seem unlikely to make the trip over here to let the SEC punish them.

* Also pleasing is just the name of his company: "Chan transferred at least $30 million of the proceeds from ChinaCast Hong Kong to an unrelated entity completely outside ChinaCast's corporate structure, Thriving Eagle Investments Ltd."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net