SEC files lawsuit against executives of Chinese coal company
The US Securities and Exchange Commission (SEC) has filed a lawsuit against two Chinese executives from Puda Coal, accusing them of shifting its main asset to a third-party company and then selling a stake to CITIC Trust. Ming Zhao and Liping Zhu, chairman and CEO respectively, didn’t disclose their actions and went on to raise $115 million from investors after listing the company in the US.
The lawsuit is the first to be filed as part of an SEC investigation of accounting irregularities at overseas companies listed in the US, particularly Chinese firms that completed reverse takeovers (RTOs).
RTOs have proved popular among Chinese companies because they are cheaper and easier than a full IPO and involve less regulatory oversight. However, financial inconsistencies have been uncovered in filings made by several of these companies. Typical problems include overstating assets and routing funds off the books through a web of related-party transactions.
In the case of Puda Coal, the SEC claims that Zhao transferred the company's only revenue-generating asset - a 90% stake in Shanxi Puda Coal Group - to himself in September 2009. This took place weeks before the Shanxi provincial government awarded Shanxi Puda a lucrative mandate to consolidate smaller mining companies.
Zhao sold a 49% stake in Shanxi Puda to CITIC Trust, which placed the asset into a trust and sold shares in it to Chinese investors. He also pledged the remaining 51% of Shanxi Puda to CITIC Trust as collateral for a $516 million loan, receiving 1.212 billion preferred shares in the trust in return.
None of this information was disclosed in Puda Coal's SEC filings, signed off by Zhao and Zhu, as it raised capital from US investors in 2010. "At the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling US investors that Puda owned a 90% stake in that company," the SEC claims.
The SEC describes CITIC Trust as a private equity fund, but this isn't entirely accurate. China's trust companies rose to prominence in the 1990s as investment vehicles for local government projects. They have subsequently been rehabilitated as wealth management institutions and are often used to club together individual investors for collective investments in domestic private equity funds.
In 2008, CITIC Trust partnered with Singapore's CapitaLand to create China's first ever renminbi-denominated real estate private equity fund.
CITIC Trust shares a common parent - financial conglomerate CITIC Group - with CITIC Capital Partners and CITIC Private Equity, but there are no formal operational links.
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