U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22568/December 11, 2012
Securities and Exchange Commission v. Zhou, et al., Civil Action No. 12-CV-8987 (S.D.N.Y.)
SEC CHARGES U.S. BASED CONSULTANTS TO NUMEROUS CHINESE REVERSE MERGER COMPANIES WITH SECURITIES FRAUD
The Securities and Exchange Commission today filed fraud charges, among others, against Huakang “David” Zhou (Zhou) and his consulting firm Warner Technology and Investment Corporation (Warner Investment) in connection with its investigation into China Yingxia International, Inc. (China Yingxia), a now defunct Chinese reverse merger company.
The SEC alleges that Zhou and Warner Investment, key players assisting numerous Chinese companies access and navigate the U.S. capital markets in recent years, engaged in varied misconduct from at least 2007 through 2010. Zhou and Warner Investment, through Zhou, have acted as advisers to over twenty Chinese issuers, locating private companies in China to bring public in the U.S., conducting reverse mergers and, for some, thereafter maintaining prominent, if not controlling, roles with the companies’ management and financial operations.
Zhou engaged in unregistered sales of securities for several clients, including by conducting an unregistered public offering of over $5 million in securities to roughly 85 Chinese-Americans in several states. Zhou and his firm also improperly assisted with securities offerings for two clients while acting as unregistered securities brokers, and further aided and abetted others’ unregistered broker-dealer violations.
In connection with raising $2 million for one client, Zhou engaged in deceptive conduct and made material misrepresentations and omissions to investors. Among other things, Zhou misused a significant portion of the investment proceeds to pay $271,500 towards his mortgage on a million-dollar condo in New York City. As well, Zhou concealed from investors that their money would be put at risk due to the circuitous manner in which Zhou sent proceeds to China. Unknown to the investors, Zhou sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who apparently had no affiliation with the company. The individuals supposedly then wired the money to the company’s chief executive officer, who in turn purportedly transferred the money to the company’s Chinese bank account.
Further, Zhou committed securities fraud by orchestrating an elaborate scheme in an apparent effort to list another client, a Chinese real estate company, on a national securities exchange. Zhou engaged in manipulative trading, including matched orders, to meet the minimum bid required for listing. As well, via gifts of stock and a purportedly private sale to a broker dealer, Zhou in effect artificially created a sufficient number of shareholders to meet a listing requirement that applicants have in excess of 400 round lot shareholders (holders of 100 shares or more). Zhou’s scheme succeeded, and the company was approved for listing in the fall of 2010.
The SEC’s complaint against Zhou and Warner Investment 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 thereunder, and control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b) thereunder.
The New York Regional Office’s Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz conducted the investigation, with assistance from Frank Milewski. Paul Gizzi and Osman E. Nawaz will lead the SEC’s litigation team. The SEC thanks the Financial Industry Regulatory Authority (FINRA) for its assistance in this matter.