By Sarah N. Lynch
WASHINGTON, Dec 11 (Reuters) - U.S. 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.
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.
OUTSIDE EXPERTS
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.
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