Securities regulators charged a New Jersey-based consultant on Tuesday with defrauding investors in the China-based companies he helped make public through a backdoor method known as a "reverse merger."
The Securities and Exchange Commission charges against Huakang "David" Zhou and his firm, Warner Technology and Investment Corporation, is the latest action by the SEC as cracks down following a rash of accounting scandals at U.S.-listed Chinese companies.
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Last week, the SEC went after the China affiliates of top accounting firms over their refusal to produce certain audit papers for U.S.-listed Chinese companies.
In July, the agency also charged Zhou's son in a related case, as well as a prominent hedge fund manager.
The SEC alleges Zhou located more than 20 private companies in China and helped them gain access to U.S. capital markets. Zhou then turned around and violated a slew of securities laws ranging from failing to disclose certain holdings to "outright fraud," the SEC said.
An attorney for Zhou could not be immediately reached for comment.
The agency said Zhou earned millions of dollars in consulting fees by helping companies that later had major problems, such as China Yingxia International Inc, which collapsed in 2009 amid reports its chief executive had committed fraud.
"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," said Andrew Calamari, the director of the SEC's New York Regional Office.
The SEC is also pursuing outside experts such as consultants and auditors for their involvement in China Yingxia.
In July, the SEC charged hedge fund manager Peter Siris, who also consulted for China Yingxia, with insider-trading and misleading investors.
Siris, known for his bullish bets on Chinese companies, settled the SEC charges for $1.1 million without admitting or denying the allegations.
At that same time, the SEC also charged several other defendants, including Zhou's son, Peter Dong Zhou, in a case tied to China Yingxia.
That case alleged the younger Zhou engaged in insider-trading and sold unregistered securities while assisting in the company's reverse merger. He agreed to pay more than $73,000 to settle the charges.
For well over a year now, the SEC has been investigating accounting irregularities at U.S. listed Chinese companies as dozens of them began disclosing auditor resignations or bookkeeping problems.
Some were involved in reverse mergers in which the Chinese companies merged with U.S. shell companies. Others entered the public markets through initial public offerings.
The SEC has launched enforcement actions against the companies and their executives, as well as against outside advisers such as auditors and consultants. It suspended trading in many companies, which were later delisted by exchanges.
The SEC's latest complaint against the elder Zhou, filed in a U.S. district court in Manhattan, contains a variety of allegations.
For instance, the commission alleges he raised $2 million for his client, Nano Silicon Technologies, while failing to tell investors he misused a "significant portion" of the proceeds to pay $271,500 towards a mortgage on a million-dollar condo in New York and a $40,000 refund for his wife.
The SEC also claims Zhou engaged in a manipulative trading scheme to help another Chinese client meet the $4 minimum bid required for a U.S. listing on the Nasdaq exchange. The SEC said he schemed to artificially create a sufficient number of shareholders, leading Nasdaq to approve the company for listing in 2010.
The SEC has since approved tougher listing standards for reverse mergers on the Nasdaq and the New York Stock Exchange.
(Reporting By Sarah N. Lynch. Editing by Andre Grenon)