The U.S. Justice Department charged two men for allegedly bilking U.S. investors out of millions of dollars by inflating the price of U.S. shares in a Nanjing-based company — spotlighting how the Trump administration is ratcheting up scrutiny of trading in Chinese companies on American stock exchanges.
The case accuses the pair of allegedly inflating the price of shares in Ostin Technology Group Co., which trades on the Nasdaq stock exchange, according to an indictment filed in Virginia. The two men allegedly then dumped their shares and reaped more than $100 million.
The Justice Department said unwitting investors suffered losses when the company lost more than $950 million in value in one day in June, according to the indictment.
Neither Ostin Technology Group nor Nasdaq has been accused of wrongdoing.
“The defendants targeted American retail investors through a predatory pump and dump scheme to take advantage of the artificial inflation of the price of OST shares,” Matthew Galeotti, acting head of the department’s criminal division, said in a statement. “Today’s charges show the criminal division’s focus on aggressively protecting Americans from foreign actors seeking to exploit US markets.”
The department is taking action “quickly to seize the proceeds of these crimes and mitigate losses for victims,” Galeotti said.
Offshore Locations
The case highlights a legal structure used by Chinese companies that establish shell corporations in offshore locations to list on U.S. stock markets. Caymen Islands-registered Ostin Technology Group used this structure, known as a variable interest entity, or VIEs, according to the indictment.
VIEs have become a flashpoint for regulators both in the U.S. and China over the past few years. U.S. officials have made increased queries focused on the nature and direction of cash flows through the companies.
Meanwhile, Beijing also has stepped up their oversight of companies trading in offshore markets, making a slew of new rules. VIEs have allowed Chinese companies to circumvent Beijing’s restrictions on foreign ownership.
The Justice Department is broadly scrutinizing potential misconduct into trading involving other Chinese VIEs, Galeotti said in an interview.
Nasdaq declined to comment. The Nanjing-based company, which makes parts for consumer and commercial electronics, didn’t immediately respond to a request for comment. Lawyers for the two men weren’t listed by the court and couldn’t be located.
New Rules
Nasdaq announced a new set of proposed rules earlier this month that would include additional requirements for new listings of companies with operations based in China.
The exchange said it conducted a proactive review of trading activity, “particularly emerging patterns associated with potential pump-and-dump schemes in U.S. cross-market trading environments.”
About 160 Chinese companies have listed on the three major US exchanges using the VIE structure, accounting for a market capitalization of $1 trillion, according to a March report from the US-China Economic and Security Review Commission.
Trump in February directed his administration to develop an “America First Investment Policy” that includes greater scrutiny and potential restrictions on the ability of Chinese companies to benefit from U.S.-based investing, singling out the use of variable interest entities.
He called for officials to “review the variable interest entity and subsidiary structures used by foreign-adversary companies to trade on United States exchanges.”
According to the directive, the structures “limit the ownership rights and protections for United States investors, as well as allegations of fraudulent behavior by these companies.”
Trump told the Justice Department and FBI to provide a written recommendation on the risks posed to US investors by the entities and any evidence of criminal or civil fraudulent behavior by foreign companies currently listed on U.S. exchanges.
New Indictment
The new indictment by the Justice Department marks the first case to be brought since Trump’s directive.
The two men charged in the case allegedly artificially inflated the company’s stock price, including by promoting extravagant and guaranteed returns to potential investors on WhatsApp, according to the indictment.
Prosecutors say that during a two-month period last spring, the promotional campaign inflated the value of the company to more than $1 billion from about $22 million before the stock was dumped and investors lost their money.
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