U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22739 / July 1, 2013
Accounting and Auditing Enforcement Release No. 3483 / July 1, 2013
Securities and Exchange Commission v. Fuqi International, Inc. and Yu Kwai Chong, Civil Action No. 1:13-cv-995 (U.S. District Court for the District of Columbia)
SEC Files Fraud Charges Against Fuqi International, Inc. and Its Chairman and Former Ceo and President Yu Kwai Chong
The Securities and Exchange Commission today announced the filing of fraud and related charges against Fuqi International, Inc. (Fuqi), a China-based jewelry company, and its Chairman of the Board of Directors and former CEO and President, Yu Kwai Chong (Chong). Fuqi and Chong have agreed to settle the SEC's claims against them.
The Commission alleges that Fuqi and Chong failed to disclose cash transfers of approximately $134 million to three purportedly unknown entities. Chong directed and authorized the transfers, which occurred between September 11, 2009 and November 24, 2010. Fuqi's full board of directors was not aware of and did not approve the cash transfers, and the transactions were made without any written agreement or repayment terms. Although Fuqi has been unable to obtain independent third-party verification of a majority of the underlying cash transfers to or from the company's bank accounts, internal company records indicate that the transferred funds were returned to Fuqi throughout the same period. The funds, however, were not returned to the same bank accounts or in the same amounts as the initial transfers of cash from Fuqi. Fuqi lacked adequate internal accounting controls and incorrectly recorded the cash transfers in its books and records as increases or decreases in "other payables" or "prepaids" accounts. In addition, Chong falsely certified that Fuqi's quarterly report on Form 10-Q, for the quarter ended September 30, 2009, contained no material misstatements or omissions even though Fuqi, at Chong's direction, had transferred $27.6 million to unknown third parties during that quarter. Fuqi also did not disclose the cash transfers in its November 10, 2009 current report on Form 8-K, which rendered Fuqi's statements relating to cash in the Form 8-K misleading.
In the settled complaint, the Commission alleges that Fuqi and Chong violated the antifraud provisions of the securities laws, Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges violations of reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1 and 13b2-2. Without admitting or denying the allegations, Fuqi and Chong have consented to the entry of a final judgment that: (i) permanently enjoins them from future violations of the federal securities laws; (ii) orders Fuqi and Chong to pay civil penalties of $1 million and $150,000, respectively; and (iii) bars Chong from serving as an officer and director for five years. The proposed settlement is subject to approval by the court.
The Commission also announced today the entry of an order revoking the registration of each class of registered securities of Fuqi for failure to make required periodic filings with the Commission. See Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Fuqi International, Inc., Administrative Proceeding File No. 3-15367, Exchange Act Release No. 69895 (July 1, 2013).
The SEC's investigation was conducted by Ansu N. Banerjee, L. Delane Olson, Stacy Fresch, and Melissa R. Hodgman.