by T. GormanPosted on Posted in SECActions

The SEC continues to be aggressive in brining insider trading cases, filing its latest action on “information and belief” and “suspicious trading.” SEC v. All Know Holdings Ltd., Case No. 11 cv 8605 (N.D. Ill. Filed Dec. 5, 2011). The key question will be whether the Commission can establish a source of the inside information.

The action centers on the acquisition of Global Education and Technology Group Ltd. by Pearson plc. The former is a Cayman Islands corporation headquartered in Beijing, China. It provides English language services in China. Global’s American Depository Shares or ADSs are traded on NASDAQ. The latter is a British corporation headquartered in London whose shares are traded in New York and London. It is one of the world’s largest educational companies. On November 21, 2011 Pearson announced the acquisition of Global at premium of 105% over the previous day share closing price. Global’s share price spiked 97% from $5.37 to $10.60.

The defendants named in the complaint can be divided into four groups:

1) Lili Wang, a PRC citizen residing in Beijing who traded through an account at the San Francisco, California office of Credit Suisse Securities (USA) LLC.

2) All Know Holdings Ltd, Sha Chen and ZhiYao. All Know is a British Virgin Islands company which traded through an account at Interactive Brokers. Ms. Chen is a PRC citizen resident in Shenzhen City, China. She is the president of All Know and also traded through Interactive Brokers. Mr. Yao is a resident of Ya An, China and traded through an account at Interactive Brokers. At times each member of this group used the same IP and Media Access Control addresses to access their brokerage accounts.

3) Song Li is a PRC citizen who resides in Columbus, Indiana and purchased shares through an account at TradeKing, LLC, based in Fort Lauderdale, Florida.

4) One or more unknown purchasers who traded through an omnibus account in the name of China Everbright Securities (HK) Limited, a financial services firm which apparently is a subsidiary of Everbright Securities Company Limited based in Shanghai. Its account is held at Citigroup Global Markets, Inc.

Each of the groups made large purchases of Global ADSs in the days shortly prior to the deal announcement. None of the purchasers had a history of trading in these shares although Ms. Wang had bought shares in Global’s IPO. In some instances the traders do not appear to have the financial means to conduct the trading:

  • Ms. Wang – made one purchase of 28,000 shares on one day in mid-November, representing 43% of the shares traded that day. Her unrealized gain on the deal is $197,000.
  • The All Know group – made multiple purchases in mid-November with the company purchasing on three occasions and defendants Chen and Yao on, respectively, two and twenty-two occasions. The company had an unrealized gain of about $1 million while Defendant Chen’s trading yielded about $273,000 and Defendant Yao netted profits of about $285,000 from the sale of his shares.
  • Defendant Li traded on multiple days beginning in early November, acquiring 24,592 shares. Most, but not all of those shares, were liquidated at a profit of over $141,000.
  • Unknown purchasers – made one purchase on November 18, 2011 of 161,100 shares. Those shares were sold yielding a profit of about $850,000.

The central question in the case is the source of the inside information. Ms. Wang is the only defendant for which the complaint offers any insight. She has an undefined relationship with Xiaodong (Veronica) Zhang, the co-founder and Chairman of the Board of Global. Based on information and belief the complaint alleges that Ms. Zhang tipped Ms. Wang. That belief is predicated the claim, also made on information and belief, that Ms. Zhang funded the purchases. In this regard the complaint claims that Defendant Wang received a wire of $367,574.50 from an account of Oriental Light Consulting Ltd on October 12, 2010. Ms. Zhung is, according to a filing, the sole director of that company. In addition, when Credit Suisse assessed a $700 service charge for holding Ms. Wang’s IPO shares, it was paid by a wire transfer from Oriental Light. The complaint does not allege a source of information for the other trading groups. It also does not allege a connection between the four groups.

The Commission’s complaint alleges violations of Exchange Act Section 10(b). At the time the complaint was filed the SEC obtained an emergency freeze order over $2.7 million is trading profits. A hearing on the Commission’s motion for a preliminary injunction is set for December 15, 2011.

Tagged with:

by T. GormanPosted on Posted in SECActions

The Commission brought a financial fraud action against the controlling shareholder of a now failed public company and her sister-in-law who was at one time employed by the firm. The complaint claims that the two defendants orchestrated a scheme in which over $47 million in fraudulent sales were booked and revenue was overstated in 2007 and 2008 by a range of 14.4% to 76.8%. SEC v. Chu, Case No. CV 11-09859 (C.D. Cal. Filed Nov. 29, 2011); see also Lit. Rel. No. 22174 (Dec. 2, 2011).

The action focuses on Soyo Group, Inc., a California based company sold LCD televisions, monitors, computer parts and peripherals. Its shares were traded on the American Stock Exchange. During 2007 and 2008 the company reported over $197 million in net revenues. When Soyo could not repay loans to its bank, on May 5, 2009 it filed for bankruptcy.

One defendant is Nancy Shao Wen Chu, the largest shareholder of the company with 47% of its shares. Ms. Chu also served as CFO of the company from 2002 through 2009 and was a member of the board of directors. She ran the operations of the company. The other defendant is Elizabeth Tsang who was employed as an accounting manager by the company from 2002 through 2009.

According to the Commission’s complaint, the two defendants used a number of fraudulent devices to overstate the revenues of the company and mislead its auditors and primary lending bank during the two year period including:

  • Booking $47 million in fraudulent sales revenue from at least 120 fictitious transactions with 21 customers;
  • Using phony receivables to acquire working capital from a revolving line of credit at the primary bank of the company, United Commercial Bank;
  • Round-tripping funds through Asian bank accounts to pay off the receivables connected with the false sales in order to avoid detection by the outside auditors, Vasquez & Company and the bank;
  • Falsifying and forging documents in an effort to substantiate the fictitious sales; and
  • Falsely representing in a Form 10-Q that the company had completed a deal in which 5.9 million shares of its common stock would be exchanged with a creditor to extinguish over $6 million, thereby reducing current liabilities by almost 14% when in fact the deal was never finalized.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as control person liability under Exchange Act Section 20(a). The case is in litigation.

Tagged with: