U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23311 / July 24, 2015
Securities and Exchange Commission v. Ming Zhao and Liping Zhu, Civil Action No. 12-CV-1316 (DLC) (S.D.N.Y., Filed Feb. 22, 2012)
District Court Enters $250 Million Default Judgment Against Former Company Executives in Puda Coal Fraud
The Commission announced today that the U.S. District Court for the Southern District of New York entered final judgments by default against defendants Ming Zhao (Zhao), the Chairman of Puda Coal, Inc. (Puda) and Liping Zhu (Zhu), Puda's former CEO. Both defendants are Chinese nationals. In addition to ordering permanent injunctions against future antifraud and related violations, the Court ordered both defendants to disgorge, jointly and severally, $116,000,000, along with prejudgment interest of $17,582,250.84. Zhao was also ordered to disgorge an additional $33,471.50 representing his additional ill-gotten gains, along with prejudgment interest thereon in the amount of $5,224.71, and to pay a penalty of $116,000,000. Zhu was also ordered to disgorge an additional $108,248 representing his additional ill-gotten gains, along with prejudgment interest thereon in the amount of $16,264.73, and to pay a penalty of $1,200,000. All told, the Court ordered over $250 million in disgorgement and civil penalties for the defendants' securities law violations. In addition, the Court permanently prohibited both defendants from serving as an officer or director of any public issuer.
On February 22, 2012, the Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Zhao and Zhu with securities fraud for the undisclosed theft of the primary asset of Puda. According to the complaint, Zhao and Zhu perpetrated a massive fraud on Puda's public shareholders by effectively stealing and selling Puda's operating subsidiary. Before the defendants' fraud, Puda held an indirect 90% ownership stake in Shanxi Puda Coal Group Co., Ltd (Shanxi Coal), a coal mining company located in the Shanxi Province of the People's Republic of China (PRC). In September 2009, just weeks before Puda announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao, with Zhu's knowledge and complicity, transferred Puda's 90% stake in Shanxi Coal to himself. In July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co. Ltd. (CITIC Trust), a Chinese private equity fund controlled by CITIC Group, which is reported to be the largest state-owned investment firm in the PRC. CITIC Trust placed its 49% stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. In addition, Zhao caused Shanxi Coal to pledge 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion ($516 million) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212 billion preferred shares in the trust. None of these asset transfers were approved by Puda's board or its shareholders or disclosed in Puda's various SEC filings, which Zhao and Zhu signed knowing that those documents were materially false and misleading. Puda also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in the coal company, Puda's sole source of revenue. Thus, at the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling U.S. investors that Puda owned a 90% stake in that company. All told, Puda raised $116 million in net offering proceeds from the two offerings. As a result of the defendants' fraud, Puda became little more than a shell company, with no ongoing business operations.
With the entry of the default judgments, the Commission received the full relief requested in the complaint. Both Zhao and Zhu were charged in the Commission's complaint with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, 13b2-2, 14a-3, and 14a-9a thereunder. Both men were also alleged to be liable pursuant to Section 20(a) of the Exchange Act as control persons of Puda for Puda's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and that they were also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting those violations. Zhu was also charged with violating Exchange Act Rule 13a-14.
The SEC's litigation was conducted by Sheldon Pollock and George Stepaniuk, and was supervised by Sanjay Wadhwa. Scott York, Lisa Knoop, Neil Hendelman, and Desiree Marmita assisted during the investigation.
For further information, see Lit. Release No. 22264 (February 22, 2012).