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SEC Alleges China Coal Company Defrauded Investors

Bruce Carton | February 22, 2012

The SEC has charged two China-based executives with fraud for misrepresenting that investors were investing in a Chinese coal business called Puda Coal when in fact they were investing in an empty shell company. 

The SEC alleges that Puda Coal Inc.'s chairman Ming Zhao conspired with former CEO Liping Zhu to secretly transfer Puda Coal's controlling interest in Shanxi Puda Coal Group, its sole revenue-producing asset, to Zhao. Zhao then allegedly "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." 

According to the SEC, Zhao and Zhu failed to disclose these transactions, which left Puda Coal as a shell company with no ongoing business operations. Puda Coal became a public company traded on the NYSE from September 2009 to August 2011 through a reverse merger in July 2005. 

The SEC's case against the Puda Coal executives follows a string of cases in 2011 in which regulators and shareholders alleged fraud related to US-listed Chinese companies. Many of these allegations involved companies formed through reverse mergers (aka “reverse takeovers”).

On March 13, I will moderate a webcast that will examine how US-listed Chinese companies can repair the reputational damage of the past in 2012. The webcast will discuss how these companies should replicate the rigorous due diligence process and IPO preparation that many reverse takeover companies circumvented, to achieve both structural and reputational rehabilitation. US-listed Chinese companies, as well as those who invest in China or do business in China, will benefit from the panel's (Christine Beliveau and Gordon McCoun of FTI Consulting, and Patrick Hunnius of DLA Piper) expertise on what companies should be doing differently now following the turmoil in 2011.

To learn more or to attend this free webcast scheduled for Wednesday, March 13, at 11 am Eastern, please visit this link.