In yet another sign that the SEC is pursuing fraudulent Chinese companies with a vengeance, the agency has filed a lawsuit against Huakang "David" Zhou, a man who allegedly specialized in bypassing regulations to get Chinese firms to U.S. markets.
Last week, the SEC announced that it was investigating the Chinese bases of the "Big Four" accounting companies for violating U.S. disclosure requirements for their clients. With Zhou's case, it looks the agency is also bringing the fight home.
From at least 2007 through 20 10, Defendants engaged in varied misconduct involving some of the same clients, ranging from nondisclosure of certain holdings and transactions to outright fraud in violation ofthe federal securities laws. For a few clients, Defendants engaged in unregistered sales of securities, including by conducting an unregistered public offering of over $5 million in securities of a Chinese solar company ("Company A") to roughly 85 Chinese-Americans in several states. Defendants also improperly assisted with securities offerings for two clients by acting as unregistered securities brokers, and further aided and abetted others' unregistered broker-dealer violations.
The main points of the case are as follows:
- Zhou ran a Jersey based company called Warner Technology and Investment Company and allegedly helped around 20 Chinese companies gain access to markets in the United States.
- Some of Warner's clients don't trade anymore — China Yingxia International, for one, was brought down when its CEO was accused of running a Ponzi-like scheme, according to the complaint.
- In one case, Zhou allegedly engaged in manipulative trading to get a company's price up to $4 so it could be listed on the NASDAQ.
- Zhou is not a licensed broker dealer, but according to the complaint he paid a licensed broker dealer $200,000 to start a company called American Union that provided his clients with investment banking services. Zhou's son, a licensed broker, later took the company over.
- Zhou was allegedly an expert in the "reverse merger" in which privately held Chinese companies would join publicly traded U.S. companies in an effort to avoid regulatory scrutiny from the SEC.
- The agency also alleges that Zhou used money he raised for a company called American Nano to pay around $800,000 in personal expenditures.
If you're interested seeing how a Chinese fraud sausage is made, this should be an interesting case to watch. We'll keep you updated.
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