SEC Continues Crackdown on Companies with Substantial Foreign Operations
Over the past year, the SEC has moved to protect U.S. investors in U.S. companies with substantial foreign operations through:
- Trading suspensions of at least 20 U.S. issuers based abroad.
- Stop orders against two U.S. issuers based abroad to prevent further stock sales under materially misleading and deficient offering documents.
- Filing a subpoena enforcement action against a foreign-based audit firm to obtain documents.
In addition, the SEC has revoked the securities registration of at least 35 U.S. issuers based in the People’s Republic of China and instituted administrative proceedings to determine whether to suspend or revoke the registrations of six more issuers.
The latest company to run afoul of the SEC – AutoChina International Limited (http://finance.yahoo.com/q?s=AUTCF.OB&ql=1). The Commission charged AutoChina and 11 investors, including a senior executive and director at the China-based firm, with conducting a market manipulation scheme to create the false appearance of a liquid and active market for AutoChina’s stock.
According to the SEC’s complaint filed in the U.S. District Court for the District of Massachusetts (see http://sec.gov/litigation/complaints/2012/comp-pr2012-59.pdf) AutoChina senior executive and director Hui Kai Yan, a former AutoChina manager, and others fraudulently traded AutoChina’s stock to boost its daily trading volume. Starting in October 2010, the defendants and others deposited more than $60 million into U.S.-based brokerage accounts and engaged in hundreds of fraudulent trades over the next three months through these accounts and accounts with a Hong Kong-based broker-dealer. The fraudulent trades included matched orders, where one account sold shares to another account at the same time and for the same price, and wash trades, which resulted in no change of beneficial ownership of the shares. AutoChina and the other defendants engaged in the scheme after lenders offered AutoChina unfavorable terms for a stock-backed loan due to low trading volume in its stock.
“AutoChina and the other defendants engaged in a brazen manipulation of AutoChina’s stock to obtain favorable loan terms,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The SEC will hold accountable publicly-traded companies including foreign companies that violate the U.S. securities laws and disrupt the U.S. capital markets.”
David P. Bergers, Director of the SEC’s Boston Regional Office, added, “The investing public has a right to honest and fair markets. Manipulation of stocks has no place in the financial strategies of any public company.”
The SEC complaint alleges that in the three months before the defendants opened the U.S.-based brokerage accounts, the average daily trading volume of AutoChina’s stock was approximately 18,000 shares. From Nov. 1, 2010 to Jan. 31, 2011, the average daily trading volume increased to more than 139,000 shares. On some days, the defendants and related accounts’ trading accounted for as much as 70 percent of the trading of AutoChina’s stock.
According to the SEC’s complaint, several of the defendants are related to AutoChina’s Chairman and Chief Executive Officer, who at the time of the scheme owned more than 57 percent of the company. Three of the defendants are siblings of AutoChina’s Chairman and Chief Executive Officer and another is married to one of his siblings.
The SEC’s complaint charges AutoChina, Hui Kai Yan, Rui Ge Dong, Victory First Limited, Rainbow Yield Limited, Yong Qi Li, Ai Xi Ji, Ye Wang, Zhong Wen Zhang, Li Xin Ma, Yong Li Li, and Shu Ling Li with violating Section 17(a) of the Securities Act of 1933, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint further alleges that Rui Ge Dong, Victory First Limited, Rainbow Yield Limited, Yong Qi Li, Ai Xi Ji, Ye Wang, Zhong Wen Zhang, Li Xin Ma, Yong Li Li, and Shu Ling Li aided and abetted AutoChina’s violations of Section 17(a) of the Securities Act of 1933, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.
For its part, AutoChina has issued a statement (available here: http://markets.financialcontent.com/ir/?Module=MediaViewer&GUID=21060070&Ticker=AUTCF), which in part states: AutoChina has reviewed the SEC’s complaint and believes that it is without merit. The Company intends to defend against the claims vigorously and believes that all of the evidence it is aware of contradicts the SEC’s allegations. AutoChina continues to work closely with its legal counsel and advisors to defend the Company.
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