Litigation Release No. 22341 / April 23, 2012
Accounting and Auditing Enforcement 3383 / April 23, 2012
Securities and Exchange Commission v. SinoTech Energy Limited, Qingzeng Liu, Guoqiang Xin, and Boxun Zhang, Civ. Action No. 2:12-cv-00960 (United States District Court for the Western District of Louisiana, Lake Charles Division).
SEC Sues Chairman of SinoTech Energy for Misappropriating $40 Million of Company Cash, and SinoTech for Falsifying Asset Values
On April 23, 2012, the Commission filed suit in U.S. District Court in Lake Charles, Louisiana against China-based SinoTech Energy Limited, its Chairman and controlling shareholder, Qingzeng Liu, its CEO, Guoqiang Xin, and its former CFO, Boxun Zhang, charging the defendants with securities fraud and other violations.
The Commission alleges that Liu misappropriated more than $40 million from SinoTech's primary bank account during July and August 2011. According to the Commission, he then stood silently by in August 2011 as SinoTech attempted to counter public accusations of fraud by claiming the company held $93 million in its bank accounts ¢" a statement Liu and SinoTech knew was false.
The Commission further alleges that, since its November 2010 IPO, SinoTech has intentionally misled investors about its use of IPO proceeds and the value of its assets, specifically the lateral hydraulic drilling ("LHD") units that are central to its business. According to the Commission, SinoTech's IPO filings represented that the company would use the IPO proceeds to acquire up to 20 LHD units at an average price of $7.5 million each. Subsequent public filings made it appear that SinoTech had followed through on these representations and acquired units valued on its balance sheet at $94 million. The SEC alleges, however, SinoTech had in fact only purchased 11 units with a total value of less than $17 million. As a result, the value of LHD units shown on SinoTech's balance sheet was materially overstated.
The complaint alleges that SinoTech, Xin, and Zhang violated or aided and abetted violations of Section 17(a)(2) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-16. The complaint further charges Liu, Xin and Zhang with violations of Exchange Act Section 13(b)(5) and Rule 13b2-1, and that Xin and Zhang also violated Exchange Act Rules 13a-14 and 13b2-2. Finally, the complaint alleges Liu, Xin and Zhang were "control persons," liable under Section 20(a) of the Exchange Act. The Commission seeks permanent injunctive relief and civil penalties against all defendants, as well as disgorgement of ill-gotten gains against SinoTech and Liu. The SEC also requests bars against the individual defendants from serving as officers or directors of U.S. public companies.