SEC Charges Chinese Execs with Stealing Company's Primary Asset

The SEC filed securities fraud charges today against the Chairman of Puda Coal, Inc. (“Puda”) and the former CEO of Puda for the undisclosed theft of the primary asset of the U.S. public company they controlled. The Commission’s complaint alleges that defendants Ming Zhao, the Chairman of Puda, and Liping Zhu, Puda’s former CEO, perpetrated a massive fraud on Puda’s public shareholders by effectively stealing and selling Puda’s operating subsidiary.

Before the defendants’ fraud, Puda held an indirect 90% ownership stake in Shanxi Puda Coal Group Co., Ltd (“Shanxi Coal”), a coal mining company located in the Shanxi Province of the People’s Republic of China (“PRC”). In September 2009, just weeks before Puda announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao, with Zhu’s knowledge and complicity, transferred Puda’s 90% stake in Shanxi Coal to himself. In July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co. Ltd. (“CITIC Trust”), a Chinese private equity fund controlled by CITIC Group, which is reported to be the largest state-owned investment firm in the PRC. CITIC Trust placed its 49% stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. In addition, Zhao caused Shanxi Coal to pledge 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion ($516 million) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212 billion preferred shares in the trust. None of these asset transfers were approved by Puda’s board or its shareholders or disclosed in Puda’s various SEC filings.

Puda also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in the coal company, Puda’s sole source of revenue. Thus, at the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling U.S. investors that Puda owned a 90% stake in that company. As a result of the defendants’ fraud, Puda is now little more than a shell company, with no ongoing business operations.