U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22986 / May 7, 2014
Securities and Exchange Commission v. S. Paul Kelley, et al., Civil Action No. 2:14-cv-2827 (D. N.J., filed May 5, 2013)
SEC Charges Toronto-Based Consultant and Four Others with Multiple Chinese Reverse Merger Schemes
The Securities and Exchange Commission filed a civil injunctive action on May 5, 2014, in the United States District Court for the District of New Jersey against Canadian citizens S. Paul Kelley and George Tazbaz, Roger D. Lockhart of Arkansas, Robert S. Agriogianis of Florham Park, New Jersey, and Shawn A. Becker of Overland Park, Kansas, for their roles in nearly identical schemes to take two Chinese companies -- China Auto Logistics, Inc. ("China Auto"), and Guanwei Recycling Corp. ("Guanwei") -- public through reverse mergers with U.S. public shell companies, hide their control over the companies' stock through a vast network of U.S. and international entities, sell that stock in unregistered distributions, and manipulate trading in the stock, ultimately obtaining millions in profits as a result.
The SEC's complaint alleges the two schemes were orchestrated by Kelley, in coordination with Tazbaz, Lockhart, and Agriogianis (collectively, "the Kelley Group") and Becker, an affiliated stock promoter. The complaint alleges the schemes followed a similar pattern, which began when the Kelley Group reached secret oral agreements with the management of China Auto and Guanwei that they would cover all of the companies' costs of going public in the United States, plus costs associated with the companies' securities remaining publicly traded for at least two years, in exchange for approximately 30 - 40% of the resulting public companies' stock. The complaint alleges the Kelley Group then acquired controlling interests in the stock of two publicly-held U.S. "shell" companies, which were used as the vehicles to bring China Auto and Guanwei public. The complaint further alleges that, consistent with their secret agreement, the Kelley Group paid for expenses on behalf of China Auto and Guanwei, including outside auditors, lawyers, and stock promoters, in order to prepare the companies to go public. In addition, the complaint alleges the Kelley Group structured reverse mergers between China Auto, Guanwei, and the respective shell companies, such that they initially controlled nearly all of the companies' shares that were available to be publicly traded - the "public float" - but hid that control by directing that the stock be distributed to myriad entities that the Kelley Group controlled in the U.S., Canada, and Hong Kong, and by failing to file the required SEC reports disclosing their ownership. Furthermore, the complaint alleges that at times after China Auto and Guanwei's stock began publicly trading, the Kelley Group, acting in concert with Becker and other stock promoters, manipulated the trading of the stocks, artificially boosting the stock price and volume to help facilitate the listing of both companies on NASDAQ. The complaint alleges that after succeeding in taking China Auto and Guanwei public in the United States, the Defendants sold millions of their shares in China Auto and Guanwei, and made millions in profits from their fraudulent schemes.
In addition, the complaint alleges that from approximately June 2009 through at least December 2010, Tazbaz, Lockhart, and Becker also engaged in a separate scheme to artificially inflate the price and volume of the stock of a third Chinese company that members of the Kelley Group had previously taken public, Kandi Technologies Group Inc.
The complaint alleges that Kelley, Tazbaz, Lockhart, Agriogianis and Becker each violated the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 adopted thereunder; the securities ownership reporting requirements of Sections 13(d) and 16(a) of the Exchange Act and Rules 13d-1, 13d-2 and 16a-3; and the securities registration provisions of Section 5 of the Securities Act of 1933 ("Securities Act"). The complaint also alleges that Kelley, Tazbaz, Lockhart, and Becker each violated the anti-fraud provisions Section 17(a) of the Securities Act; the market manipulation provisions of Section 9(a) of the Exchange Act; and the restrictions on purchasing during a distribution prohibited by Rule 101 of Regulation M. In addition, the complaint alleges that Kelley and Becker violated the broker-dealer registration provisions of Section 15(a) of the Exchange Act by failing to register as broker-dealers when they effected securities transactions. The SEC's complaint seeks permanent injunctions against further violations, disgorgement of ill-gotten gains, civil penalties, and other relief against the defendants.
Without admitting or denying the allegations in the Commission's complaint, Kelley, Lockhart and Agriogianis consented to entry of a final judgments in which each agreed to be enjoined from violating Sections 5, and 17(a) of the Securities Act; and Sections 9(a), 10(b), 13(d), , and 16(a) of the Exchange Act, and Rules 10b-5, 13d-1, 13d-2, and 16a-3 thereunder. Kelley and Lockhart further agreed to be enjoined from violating Rule 101 of Regulation M; Kelley additionally agreed to be enjoined from violating Section 15(a) of the Exchange Act. Kelley also agreed to pay disgorgement of $2,828,353.53, prejudgment interest of $560,812.47 and a civil penalty of $2,828,353.53. Lockhart also agreed to pay disgorgement of $1,819,211.77, prejudgment interest of $332,268.15, and a civil penalty of $1,000,000. The amount of disgorgement and civil penalties to be assessed against Agriogianis will be determined by the court at a later time. Lockhart and Agriogianis agreed to penny stock bars.
The SEC's claims against Tazbaz and Becker will be determined after a trial, which has not been set.
The SEC's investigation was conducted in the Denver Regional Office by Jennifer A. Ostrom and Kurt L. Gottschall. Leslie J. Hughes and Nicholas P. Heinke will lead the SEC's litigation.