Among recent enforcement actions taken by the SEC were charges against a Miami-based entrepreneur for defrauding investors against a hedge fund manager for trading illegally in Chinese stocks, which cost the manager and his firms $44 million in disgorgement and penalties; charges against a Florida-based securities lawyer for forging attorney opinion letters on microcap stocks; and charging a New York-based fund manager for running fraudulent trading schemes, as well as charges against a New Jersey-based cosultant to Chinese reverse merger companies for securities law violations.
Hedge Fund Manager Pays $44 Million over Illegal Chinese Stock Trades
Sung Kook “Bill” Hwang of Tenafly, N.J., the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, two New York-based hedge funds, was charged by the SEC with conducting a pair of trading schemes involving Chinese bank stocks that made $16.7 million in illicit profits.
The SEC also charged Raymond Y.H. Park, of Riverdale, N.Y., for his roles in both schemes as the head trader of the two hedge funds involved: Tiger Asia Fund and Tiger Asia Overseas Fund. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey also announced criminal charges against Tiger Asia Management.
According to the SEC, Hwang committed insider trading by short selling three Chinese bank stocks based on confidential information he and his firms received in private placement offerings. Hwang and his firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price.
According to the SEC’s complaint filed in federal court in Newark, N.J., from December 2008 to January 2009, Hwang and his advisory firms participated in two private placements for Bank of China stock and one private placement for China Construction Bank stock. Before disclosing material nonpublic offering information, the placement agents required wall-crossing agreements from Park and the firms to keep the information confidential and refrain from trading until the transaction took place.
Despite agreeing to those terms, Hwang ordered Park to make short sales in each stock in the days prior to the private placement. Hwang and his firms illegally profited by $16.2 million by using the discounted private placement shares they received to cover the short sales they had entered into based on inside information about the placements.
The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange. These stocks were among the largest short position holdings in the hedge funds’ portfolios.
The manipulation was designed to lower the price of the stocks and increase the value of the short positions, thus enabling Hwang and Tiger Asia Management to illicitly collect higher management fees from investors. The more assets the hedge funds had under management, the greater the management fee that Tiger Asia Management was entitled to collect.
So Hwang directed Park to place losing trades; this would depress the stock prices and inflate the calculation of the management fees. Hwang and Tiger Asia Management made approximately $496,000 in fraudulent management fees through this scheme.
Hwang and his firms have agreed to pay $44 million to settle the SEC’s charges. The settlements, subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest. Each has agreed to pay a penalty of $8,294,348 for a total of 24,883,044.
Park also agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.
Consultant to Chinese Reverse Merger Companies Charged
Huakang “David” Zhou, a New Jersey-based consultant, was charged by the SEC with violating securities laws and defrauding some investors while helping Chinese companies gain access to the U.S. capital markets.
The SEC alleges that Huakang “David” Zhou and his consulting firm Warner Technology and Investment Corp. located more than 20 private companies in China to bring public in the U.S. through reverse mergers, and then committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.
After earning millions of dollars in consulting fees, Zhou and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations. Zhou’s son as well as a number of other individuals and firms have previously been charged with misconduct related to China Yingxia.
The SEC alleges that the elder Zhou engaged in varied misconduct ranging from nondisclosure of certain holdings and transactions to outright fraud. For instance, Zhou failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange. Zhou also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Warner Technology and Investment Corporation advertises itself on its website as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger with an OTCBB trading company.
Zhou’s misconduct occurred from at least 2007 to 2010. After completing the reverse mergers, Zhou strongly influenced or even directed many of his clients’ newfound U.S. presence and obligations as public companies. He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and receive any proceeds from fundraising done in the U.S. This enabled Zhou to control how and when offering proceeds were wired to China, and gave him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.
The SEC alleges that while Zhou raised $2 million for client American Nano Silicon Technologies, he concealed from investors that their money would be put at risk due to the circuitous way he purportedly sent investment proceeds to China. Unknown to investors, Zhou controlled a U.S. bank account for the issuer and sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who had no apparent affiliation with American Nano. The individuals were to then wire the money to the company’s CEO, who would transfer the money to the company’s Chinese bank account. Zhou failed to disclose to investors that he engaged in these questionable wire transfers to evade Chinese currency regulations.
Although investment proceeds were in part used for seemingly legitimate company expenses in the U.S. such as to pay accountants, the transfer agent, and an investment bank, Zhou used some of the money as his own. In addition to the $271,500 of investor money he used for mortgage payments, he paid his wife a “refund” of $40,000 for undisclosed reasons and wrote a check for $5,824 to “cash.”
The SEC alleges that Zhou engaged in manipulative trading as part of his scheme to list China HGS Real Estate on a national exchange, including matched orders to meet the $4 minimum bid required for listing. Through gifts of stock and a purportedly private sale to a broker-dealer, Zhou schemed to artificially create a sufficient number of shareholders to meet a listing requirement to have more than 400 “round lot shareholders” with 100 shares or more. The scheme succeeded, and Zhou’s client was approved for listing on the exchange.
According to the SEC’s complaint, Zhou engaged in unregistered sales of securities for several clients, including a $5 million offering to roughly 85 Chinese-Americans living in several U.S. states. Zhou and his firm also improperly assisted with securities offerings for two clients while not registered as broker-dealers, and they aided and abetted violations by other unregistered brokers.
The SEC’s complaint against Zhou and Warner Technology and Investment Corp. alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3. It further charges Zhou for control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b).
Securities Lawyer Charged with Forging Attorney Opinion Letters
The SEC has charged securities lawyer Guy Jean-Pierre of Pompano Beach, Fla., also known as Marcelo Dominguez de Guerra, with issuing fraudulent attorney opinion letters that resulted in more than 70 million shares of microcap stock becoming available for unrestricted trading by investors.
Jean-Pierre was banned by the Pink Sheets (now OTC Markets Group) in April 2010 from issuing attorney opinion letters–required from a licensed and duly authorized securities lawyer to facilitate the transfer of restricted microcap shares on the over-the-counter markets–due to “repeated missing information and inconsistencies” about the issuers and his lack of due diligence in his past letters.