by T. GormanPosted on Posted in SECActions

Chinese issuers have been a focus of the Commission as well as the class action bar in recent months. The SEC, for example, has revoked the registration statements of over a dozen Chinese issuers and has another 27 revocation cases pending. One of the largest groups of securities class actions filed last year was cases brought against Chinese issuers that went public through a reverse merger.

Yesterday the Commission brought another enforcement action against a Chinese issuer. The case centered on a Chinese company and its former Chairman and CEO as well as its current CEO. At one time the company owned a valuable coal mine. As part of a fraudulent scheme the coal mine was transferred to another entity in the Peoples Republic of China or PRC following which the PRC and U.S. company simultaneously sold their shares to investors in each country, all of whom thought they were acquiring an interest in the same coal mine. SEC v. Ming Zhao, Case No. 12 CV 1316 (S.D.N.Y. Filed Feb. 22, 2012).

The case focuses on Puda Coal, Inc., a Delaware corporation with a principal office in Taiyucan, Shanxi Province, PRC. Its shares were traded on the NYSE from September 2009 through August 2011. The primary asset of the company was Shaux Coal, a coal mining company that was an indirect subsidiary 90% owned by Puda.

On September 28, 2009, Puda announced that Shanxi Coal was one of the entities selected by the Shanxi provincial government to become a coal mining consolidator. This was an extremely lucrative opportunity for the company. Earlier in September, however, Puda’s CEO, defendant Ming Zhao, transferred all of the company’s interest in Shanxi Coal to himself. Subsequently, in July 2010 Mr. Zhao transferred 49% of the coal company to CITIC Trust Co., a Chinese private equity fund. That fund was controlled by CITI Group, the largest state-owned investment firm in the PRC. Mr. Zhao also arranged to have Shanxi Coal pledge 51% of its assets to CITI Trust as collateral for a loan of about $370 million.

During the summer of 2010 CITI Trust sold shares to the Chinese public in a trust which held a 49% interest in Shanxi Coal. In 2010 Puda conducted two public offerings in the United States of shares to raise capital for the operations of Shanxi coal, its supposed sole source of revenue. Those shares were sold to U.S. investors. Chinese investors actually received shares in a trust which owned part of the coal company. U.S. investors received shares in a company which was a shell.

After the Commission’s investigation began defendant Liping Zhu forged a letter supposedly from CITIC Trust which falsely disclaimed any interest in Shanxi Coal. The letter was produced to the staff by U.S. counsel. After it was disclosed in a filing with the Commission, the letter was exposed as a fraud. Mr. Zhu then admitted the forgery and resigned. Mr. Zhao became CEO. The share price of Puda dropped from $17 to a few cents.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 12(b)(2)(B), 13(b)-5 and 14(a). The action is pending.

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by T. GormanPosted on Posted in SECActions

The Department of Justice ended one of its most significant FCPA prosecutions against individuals in the history of the Act, voluntarily dismissing with prejudice all of the remaining charges in the Africa sting case. U.S. v Goncalves, No. 09-cr-335 (D.D.C.). The court papers filed by the DOJ stated that the unprecedented step follows careful consideration of three factors: “(1) the outcomes of the first two trials in which . . . juries remained hung as to seven defendants and acquitted two . . . and one defendant [was acquitted] . . .pursuant to Fed. R. Crim. P. 29; (2) the impact of certain evidentiary and other legal rulings . . .; and (3) the substantial governmental resources, as well as judicial, defense, and jury resources, that would be necessary to proceed . . .”

The dismissal may mark a turning point in FCPA enforcement. The DOJ and SEC have had a string of significant corporate settlements over the years. Ever increasing sums were paid in settlement. What was once a headline grabbing, and record setting amount, became an after thought in the wake of the next huge case and even larger settlement.

Born of this trend, the African sting case was quickly hailed as another FCPA milestone. It represented the largest FCPA sting operation in history. Twenty two defendants were indicted in an action that was so large it had to be broken into segments for trial. Early on defendants began pleading guilty. What had been declared to be a “new era” of FCPA enforcement seemed destine to continue.

Then things started to unravel. In the first corporate case where a jury returned a verdict, the court tossed the case out on post-trial motions as to Lindsey Manufacturing and the other defendants. U.S. v. Aguillar, Case no. 2:10-cr-01031 (C.D.Cal.). While the ruling was predicated on prosecutorial misconduct, the court made it clear that a key factor was the weakness of the evidence. The first African Sting case ended with a hung jury after the court dismissed substantive FCPA charges as to certain defendants and each money laundering charge. In another case the court dismissed all the FCPA charges as to former ABB official John O’Shae. U.S. v. O’Shae, H-09-cr-429 (S.D. Tx). Subsequently the DOJ dismissed the remaining charges. That was followed by the second African Sting trial which ended in two acquittals and a hung jury as to three defendants. Post trial juror comments made it clear that that jurors thought little of the government’s case.

In the wake of DOJ’s dismissal of all the remaining African sting charges the critical question is where does the “new era” of enforcement go? Nobody would seriously argue with the goals of the FCPA. At the same time enforcement officials have steadfastly resisted efforts to amend portions of the Act to give clarity to key terms such as who is a foreign official or to add a compliance defense which should only serve to foster the goals of the FCPA. Those officials also seem to have overlooked suggestions that their interpretations of the Act are at times over-reaching such as in the application of its jurisdictional provisions and the construction of the facilitation payment provisions.

Perhaps now is a good time to stop and reflect on what the courts and jurors have said about the “new era” of FCPA enforcement. Surely that era should be more than a dazzling array of ever increasing monetary payments by corporations or actions against individuals built on questionable blue collar tactics. Surely it should be more than business organizations spending ever increasing sums to conduct far reaching and perhaps at times unnecessary investigations at huge expense in a effort to win cooperation credit. Surely it should be more than brining increasing numbers of charges against individuals and demanding longer and longer prison terms. Perhaps now is the time to craft meaningful reform to the Act and enforcement policy to ensure clearer guidance and a more balanced application of the statutes to ensure that the laudable goals of the statute in a fair and balanced manner in the future. That would truly be a “new era” of FCPA enforcement.

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