After Casey Urges SEC to Address Chinese Shell Companies, Two China-Based Executives Charged With Securities Fraud

SEC Announces Charges Against Puda Coal Alleging They Set Up Empty Shell Company

In December, Casey Called for Crackdown on Illegal Maneuvers by Companies from China That Hurt U.S. Investors, Energy Industry

WASHINGTON, DC- Today, following U.S. Senator Bob Casey’s (D-PA) call to address illegal practices by companies from China, the Securities and Exchange Commission (SEC) has announced charges against two Chinese executives who allegedly set up a shell corporation to scheme U.S. investors out of their money.

“The SEC is taking a step in the right direction by cracking down on China-based shell companies, but this effort is just the beginning of what’s needed to protect U.S. investors and the energy industry,” Senator Casey said. “American energy businesses and workers can compete with anyone in China as long as they play by same the rules. We have a long way to go to level the playing field but this is a step in the right direction.”

This week, the Securities and Exchange Commission charged two China-based executives with defrauding investors into believing they were investing in a Chinese coal business when in fact they were investing in an empty shell company.

The SEC alleges that Puda Coal Inc.’s chairman Ming Zhao schemed with former CEO Liping Zhu to steal and sell Puda Coal’s sole revenue-producing asset, a coal mining company named Shanxi Puda Coal Group.  Zhao secretly transferred Puda Coal’s controlling interest in Shanxi Coal to himself and then sold a substantial portion to a fund controlled by what is reported to be China’s largest state-owned financial firm.  The scheme enabled Zhao rather than Puda Coal’s public shareholders to profit from a lucrative business opportunity.

The SEC alleges that Zhao and Zhu failed to disclose these transactions in Puda Coal’s periodic reports to the SEC, and continued to raise funds from U.S. investors by conducting two public offerings to purportedly raise capital to enable Shanxi Coal to acquire coal mines.  Unbeknownst to investors, Puda Coal no longer had an ownership stake in that company after Zhao’s secret maneuvers.  After the SEC began investigating, Zhao and Zhu further schemed to forge a letter from the Chinese financial firm purporting that Puda Coal investors weren’t harmed by the asset transfers.  In reality, the scheme left Puda Coal as a shell company with no ongoing business operations.

In December, Senator Casey called on the SEC to better protect U.S. investors from these types of scams. His full letter to the SEC’s Chairwoman, Mary Shapiro, can be seen below:

Dear Ms. Schapiro:

I am writing today to ask the Securities and Exchange Commission (SEC) to investigate the means by which Chinese companies gain access to our capital markets and make recommendations as to how we may better protect American investors. 

According to a recent report in the Pittsburgh Tribune-Review, Chinese companies are using offshore holding companies to circumvent American legal barriers and gain access to our domestic capital markets.  Further, once these investments have been made, investors have limited shareholder protections and non-existent recourse against fraud. 

Recent activity in the solar energy industry illuminates the issues at hand.  In recent years, I understand that a number of Chinese solar panel producers set up shell companies in the Cayman Islands to sell shares on the New York Stock Exchange and NASDAQ.  American investors responded, investing heavily in these companies.  These investments quickly proved unwise as China began to heavily subsidize its domestic solar industry and drive worldwide prices down, hurting the stock prices of the shell companies. 

Investors have no recourse to confront these situations.  First, U.S. investors cannot properly vet their investments.  Under Chinese law, accounting data is confidential, which means investors cannot verify accounting data from Chinese firms.  Without this verification, Chinese firms should not be allowed on U.S. stock exchanges under any circumstances.  Furthermore, even in cases of fraud, U.S. investors are not able to regain their money, because China will never allow any U.S. legal decision to be enforced. 

These practices have a devastating impact beyond our financial markets.  The U.S. solar panel industry has been severely impacted by China’s illegally subsidized solar industry. Recently, the International Trade Commission voted 6-0 to move ahead with a case to impose duties on Chinese solar panels to restore a level playing field for American manufacturers.  While the trade angle is essential to protecting our domestic industry, we must also protect our investors.  China cannot circumvent our laws to their tremendous advantage.

I would urge the SEC to investigate these practices.  I look forward to working with you to protect our domestic industries.

Sincerely,

Robert P. Casey, Jr.

United States Senator

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