Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, December 11, 2012

SEC Charges Consultant with Fraud For Role in Chinese Firms' Reverse Mergers

The SEC charged Huakang “David” Zhou, a New Jersey-based consultant, with violating securities laws and defrauding some investors while helping Chinese companies gain access to the U.S. capital markets. According to the SEC, Zhou and his consulting firm Warner Technology and Investment Corporation located more than 20 private companies in China to bring public in the U.S. through reverse mergers and committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.  After earning millions of dollars in consulting fees, Zhou and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations.  The SEC has previously charged several individuals and firms with misconduct related to China Yingxia, including Zhou’s son.

The SEC alleges that the elder Zhou engaged in varied misconduct ranging from non-disclosure of certain holdings and transactions to outright fraud.  For instance, Zhou failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange.  Zhou also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Warner Technology and Investment Corporation advertises itself on its website as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger with an OTCBB trading company.  Zhou’s misconduct occurred from at least 2007 to 2010.  After completing the reverse mergers, Zhou strongly influenced or even directed many of his clients’ newfound U.S. presence and obligations as public companies.  He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and receive any proceeds from fundraising done in the U.S.  This enabled Zhou to control how and when offering proceeds were wired to China, and gave him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.

 

http://lawprofessors.typepad.com/securities/2012/12/sec-charges-consultant-with-fraud-for-role-in-chinese-firms-reverse-mergers.html

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