SEC Files Partially Settled Manipulation Action
The Commission brought another action centered on reverse mergers involving Chinese issuers. This action differs from earlier cases, however, since it focuses on the promoters who are charged with manipulating the shares rather than the companies. SEC v. Kelley, (D. N.J. Filed May 5, 2014).
The action centers on trading in the shares of two issuers, China Auto Logistics, Inc. and Guavwei Recycling Corporation. The former is based in Tianjin, China. It operates a web-based automobile sales and trading platform. Before the merger it was known as Tianjin Seashore New District Shisheng Business Trading Group. Co. The latter, previously known as Fuqing Guanwei Plastic Industry Co., Ltd., has its principal place of business in Fuqing City, China. It manufactures and distributes recycled plastic products.
The defendants are Paul Kelly, a Canadian citizen who purportedly owns a number of public shells. George Tazbaz, a Canadian citizen who has interests in entities used in the scheme. Roger Lockhart, an Arkansas resident who was a broker from 1986 until August 2006. He has de facto control over certain entities used in the scheme. Robert Agiogianis, a resident of New Jersey, who owns a public relation firm used in the scheme. And, Shawn Becker, a Kansas resident who was also previously a broker and is an investor in another public relations firm used in the scheme.
Over a four year period beginning in 2008 the defendants took China Auto Logistics and Guanwei Recycling public through reverse merges with U.S. public shell companies. In each instance the defendants concealed their ownership interest in the firm and then manipulated the stock, reaping millions of dollars in profits.
The schemes, according to the SEC’s complaint, were largely identical. Each involved the following common elements:
- The group reached an agreement with the firm management under which they would cover all the expenses of going public in the U.S. markets in addition to the continuing costs for a period of two years;
- The group would be paid 30% to 40% of the firm’s stock;
- The group acquired a controlling interest in the shell to be used to take the firm public;
- The group then paid all the expenses including the outside auditors, lawyers and stock promoters for the firms to go public;
- The transactions were structured so that they controlled nearly all of the float for the firm;
- The ownership of the group was concealed;
- The shares were distributed to a number of U.S., Canadian and Hong Kong firms owned by the group without making the required filings; and
When the stock began trading Messrs. Kelly, Tazbaz, Lockhart and Argriogianis, along with stock promoter Shawn Becker and other stock promoters manipulated the trading and volume so that a listing on NASDAQ could be obtained;
Ultimately the group sold their shares, reaping millions in profits. The complaint alleges violations of Securities Acts Sections 5(a), 5(c) and 17(a), Exchange Act Sections 9(a), a 10(b), 13(d), 15(a), 16(a) and Regulation M.
Messrs. Kelley, Lockhart and Agriogianis settled with the Commission. Mr. Kelly agreed to pay over $6 million and will be barred from the securities business and from participating in any penny stock offering. Mr. Lockhart agreed to pay more than $3 million. Mr. Agriogianis entered into a cooperation agreement. The litigation is continuing as to the other defendants.