LATEST CROSS-BORDER WORKING GROUP CASE FOR SEC

FROM:  U.S. SECURITIES AND EXCHANGE  COMMISSION 
SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case

The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies.

The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company’s chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company’s external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.

According to the SEC’s complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million.

According to the SEC’s complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company’s preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress’ financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time.

According to the SEC’s complaint, China MediaExpress’ external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company’s audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress’ banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm’s team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress’ bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress’ reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to “assist with the investigation.”  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances.

The SEC’s complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media’s violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng.

SEC CHARGES SOFTWARE COMPANY AND CEO WITH MAKING MISREPRESENTATIONS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
On August 28, 2012, the Securities and Exchange Commission filed a civil action in the United States District Court for the Southern District of New York charging Wwebnet, Inc. (Wwebnet) and its chief executive officer, Robert L. Kelly (Kelly), with making material misrepresentations and omissions to investors in Wwebnet.

The SEC’s complaint alleges that, between 2005 and 2008, Wwebnet, a video software company, and Kelly made false and misleading statements and omissions to investors, including: (1) failing to disclose and misrepresentations concerning the existence of a related-party transaction, which enabled Kelly to funnel at least $2.1 million of investor funds to himself, including approximately $2 million which was sent to his personal options trading account in the Cayman Islands; (2) misrepresentations that Wwebnet had been generating revenue pursuant to contracts with entertainment companies when Wwebnet had never generated any such revenue; and (3) misrepresentations concerning Kelly’s effective compensation by failing to disclose that Wwebnet paid approximately $180,000 ($9,000 per month) in rent on Kelly’s personal luxury apartment in Manhattan.

The Complaint alleges that through these actions Wwebnet and Kelly violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and that Kelly aided and abetted Wwebnet’s violations of the Exchange Act and is liable as a control person under Section 20(a) of the Exchange Act for Wwebnet’s violations. The SEC’s complaint seeks a final judgment permanently enjoining Wwebnet and Kelly from future violations of the federal securities laws, ordering them to pay civil penalties and disgorgement of ill-gotten gains plus prejudgment interest, and imposing a penny stock bar and an officer and director bar against Kelly.

MIAMI-BASED HEDGE FUND MAMAGER ACCUSED OF DECEIVING INVESTORS REGARDING EXECUTIVES INVESTMENT'S

Photo:  Miami Beach.  Credit:  Wikimedia.
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2012 – The Securities and Exchange Commission today charged a Miami-based hedge fund adviser for deceiving investors about whether its executives had personally invested in a Latin America-focused hedge fund.

The SEC’s investigation found that Quantek Asset Management LLC made various misrepresentations about fund managers having “skin in the game” along with investors in the $1 billion Quantek Opportunity Fund. In fact, Quantek’s executives never invested their own money in the fund. The SEC’s investigation also found that Quantek misled investors about the investment process of the funds it managed as well as certain related-party transactions involving its lead executive Javier Guerra and its former parent company Bulltick Capital Markets Holdings LP.

Bulltick, Guerra, and former Quantek operations director Ralph Patino are charged along with Quantek in the SEC’s enforcement action. They agreed to pay more than $3.1 million in total disgorgement and penalties to settle the charges, and Guerra and Patino agreed to securities industry bars.

“When making an investment decision, private fund investors are entitled to the unvarnished truth about material information such as management’s skin in the game or the adviser’s handling of related-party transactions,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Quantek’s investors deserved better than the misleading information they received in marketing materials, side letters, and other fund documents.”

According to the SEC’s order instituting settled administrative proceedings, fund investors frequently inquire about the extent of the manager’s personal investment during their due diligence process, and many require it in fund selection. Quantek, particularly Patino, misrepresented to investors from 2006 to 2008 that management had skin in the game. These misstatements were made when responding to specific questions posed in due diligence questionnaires that were used to market the funds to new investors. Quantek made similar misrepresentations in side letter agreements executed by Guerra with two sought-after institutional investors.

The SEC’s order also found that Quantek misled investors about certain related-party loans made by the fund to affiliates of Guerra and Bulltick. Because the fund permitted related-party transactions with Bulltick and other Quantek affiliates, investors were wary of deals that were not properly disclosed. In 2006 and 2007, Quantek caused the fund to make related-party loans to affiliates of Guerra and Bulltick that were not properly documented or secured at the outset. Quantek and Bulltick employees later re-created the missing related-party loan documents, but misstated key terms of the loans and backdated the materials to give the appearance that the loans had been sufficiently documented and secured at all times. Quantek and Guerra provided this misleading loan information to the fund’s investors.

“The related-party transactions were problematic to begin with, and the false deal documents left investors in the dark about the adviser’s conflicts of interest,” said Scott Weisman, Assistant Director in the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s order, Quantek also repeatedly failed to follow the robust investment approval process it had described to investors in the fund. Quantek concealed this deficiency by providing investors with backdated and misleading investment approval memoranda signed by Guerra and other Quantek principals.

Quantek, Guerra, Bulltick, and Patino settled the charges without admitting or denying the findings. Quantek and Guerra agreed jointly to pay more than $2.2 million in disgorgement and pre-judgment interest, and to pay financial penalties of $375,000 and $150,000 respectively. Bulltick agreed to pay a penalty of $300,000, and Patino agreed to a penalty of $50,000. Guerra consented to a five-year securities industry bar, and Patino consented to a securities industry bar of one year. Quantek and Bulltick agreed to censures. They all consented to orders that they cease and desist from committing or causing violations of certain antifraud, compliance, and recordkeeping provisions of the Investment Advisers Act of 1940 and the Securities Act of 1933.

The SEC’s investigation was conducted by Matthew Rossi in the Enforcement Division’s Asset Management Unit under the supervision of Mr. Weisman.

SEC CHARGES CHINA-BASED COMPANY WITH MISLEADING INVESTORS ABOUT ASSET VALUES

FROM:  U.S. SECURITIES AND EXCHANGE COMISSION  
Washington, D.C., April 23, 2012 — The Securities and Exchange Commission today charged a China-based oil field services company and two senior officers involved in a scheme to intentionally mislead investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC additionally charged the company’s chairman of the board involved in a separate $40 million theft from the company.

The SEC alleges that SinoTech Energy Limited grossly overstated the value of its primary operating assets in financial statements, specifically the lateral hydraulic drilling (LHD) units that are central to its business. The company’s IPO registration statement in November 2010 promised investors it would spend $120 million raised in the IPO to acquire LHD units, but the company’s purchase contracts and other documents otherwise show it acquired far fewer LHD units, lied about the number it acquired, and grossly overstated the value of the units. SinoTech CEO Guoqiang Xin and former CFO Boxun Zhang were responsible for the fraud.

Meanwhile, the company’s chairman Qinzeng Liu is accused of secretly siphoning at least $40 million from a SinoTech bank account in the summer of 2011. He then stood silently by as SinoTech – attempting to counter negative Internet reports that the company was potentially fraudulent – falsely assured investors that the company had that money and more in the bank. Liu later admitted his theft to SinoTech’s auditor and board of directors, but he retained his position and investors were not informed of the incident.
“SinoTech’s brief life as a public company in the U.S. markets has been rife with falsehoods,” said David Woodcock, Director of the SEC’s Fort Worth Regional Office. “Investors deserve the utmost honesty and transparency from companies and their officers when they tap public markets in the United States.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Louisiana (Lake Charles Division), SinoTech’s public filings certified by both Xin and Zhang represented that the company had purchased 16 LHD units worth $94 million. In fact, the company only acquired 11 such units worth less than $17 million. SinoTech continually misled investors about the value of its equipment in press releases and SEC filings between December 2010 and November 2011. Xin went so far as to try (unsuccessfully) to convince SinoTech’s LHD unit supplier to issue public statements verifying the company’s false valuations to investors. The supplier refused.

The SEC’s complaint alleges that Liu’s admitted theft of $40 million in company funds occurred sometime between June 30 and August 17. Liu withdrew the money from SinoTech’s primary bank account at the Agricultural Bank of China. SinoTech did not record Liu’s withdrawal in the company’s books and records, and it retained Liu as its chairman despite his confession.

The SEC alleges that the theft remained hidden when SinoTech attempted to rebut an Internet report alleging fraud in August 2011. In an effort to persuade investors that SinoTech was legitimate, the company issued a press release stating that SinoTech’s bank balances totaled more than $93 million and included $54 million on deposit at the Agricultural Bank of China. Liu knew this claim was false due to his earlier theft from that account.

The SEC’s complaint seeks permanent injunctive relief and financial penalties against all defendants as well as disgorgement of ill-gotten gains by SinoTech and Liu. The SEC also requests bars against each of the individual defendants from serving as officers or directors of U.S. public companies.