The credibility crisis among US-listed Chinese companies is increasing, analysts said Thursday, after US securities regulators charged two Chinese executives from Puda Coal Inc Wednesday with defrauding investors by secretly transferring the company's core assets.
Zhao Ming, chairman of Puda Coal, and Zhu Liping, the company's former chief executive, failed to disclose a transaction in September 2009 that transferred the company's only revenue-producing asset, Shanxi Puda Coal Group, to Zhao, and then sold a substantial portion of it to CITIC Trust, a private equity fund, the US Securities and Exchange Commission (SEC) said in a statement Wednesday.
"Zhao and Zhu duped investors with promises that their money would be invested in a Chinese coal company, when in fact the company was an empty shell," said Robert Khuzami, director of the SEC's Division of Enforcement.
The SEC further alleged that Zhao and Zhu continued their fraudulent scheme to deceive public investors even after the SEC began its investigation. The fraud wiped out hundreds of millions of dollars in shareholder value.
The SEC has ordered that Zhao and Zhu should disgorge their ill-gotten gains and face financial penalties.
Staff at Puda Coal's office in Taiyuan, Shanxi Province declined to comment on the lawsuit yesterday.
"The case is a follow-up to the SEC's probe into fraud and accounting irregularities at China-based companies listed on US exchanges," said Li Zhongxuan, a lawyer specializing in overseas listings at Shenzhen-based DeHeng Law Offices.
Puda Coal was able to float on the New York Stock Exchange in 2005 through a reverse merger, in which companies can get their shares listed without undergoing the regulatory process of an initial public offering (IPO). It was delisted from the exchange last August after Zhao and Zhu's fraud was exposed by a US short seller.
"The lawsuit has alerted Chinese companies and their auditing firms to strengthen accounting practices, especially those that have used reverse mergers," Li said.
The case may also affect some Chinese companies that have begun the application process for a US IPO, said Wang Jia, an analyst at Beijing-based consultancy China Venture.
No Chinese companies have listed in the US since domestic video website tudou.com debuted on NASDAQ last August. Companies such as China Auto Rental Inc, online luxury retailer vipshop.com and AdChina are reportedly considering applying for a US listing in the coming months.
"The lawsuit will weaken US investors' confidence and affect China-based companies' valuation," Wang said.