SEC Charges China-Based Executives in Scheme to Overstate Revenues and Divert Money for Personal Use
FOR IMMEDIATE RELEASE
Washington, D.C., May 15, 2013 —
The Securities and Exchange Commission today charged husband-and-wife executives at a China-based company with engaging in a scheme to overstate the company’s revenues and divert proceeds from a securities offering for their personal use.
The SEC alleges that RINO International Corporation’s chief executive officer Dejun “David” Zou and chairman of the board Jianping “Amy” Qiu diverted $3.5 million in company money to purchase a luxury home in Orange County, Calif., without disclosing it to investors. Conflicting information was provided to RINO’s outside auditor when questions were raised about the expenditure. Zou and Qiu also used offering proceeds to pay for automobiles as well as designer clothing and accessories without recording them as personal expenses or otherwise disclosing them in RINO’s public filings.
The SEC issued a trading suspension in 2011 against RINO, which is a holding company for subsidiaries that manufacture, install, and service equipment for the Chinese steel industry. The company became a China-based U.S. issuer through a reverse merger in 2007. The trading suspension was based on questions raised about RINO’s public filings — signed and certified by Zou and Qiu — overstating company revenues by including false sales contracts.
Zou and Qiu agreed to settle the SEC’s charges by paying penalties and consenting to decade-long bars from serving as officers or directors of any company publicly traded in the U.S.
“Executives grossly abuse their positions of trust when they divert corporate funds for their personal spending,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “When making their investment decisions, RINO’s investors did not have the benefit of knowing that Zou and Qiu were diverting money and the company’s revenues were greatly exaggerated.”
According to the SEC’s complaint filed in federal court in Washington D.C., RINO’s periodic filings contained false and misleading statements and omissions about the company’s revenue and operations from 2008 to 2010. RINO maintained two conflicting sets of financial records — one set of books for filings in China and another set of books for filings in the U.S. The Chinese books reflected sales of approximately $31 million from the first quarter of 2008 through the first three quarters of 2010. But the U.S. books that formed the basis for RINO’s SEC filings contained false contracts and portrayed sales revenues of approximately $491 million during that same time period — more than 15 times greater than the revenues recorded in the Chinese books.
The SEC alleges that when RINO’s outside auditor discovered the $3.5 million diversion of money by Zou and Qiu, the auditor was first told that RINO intended to use the funds as a down payment for a joint venture opportunity in the U.S. When the auditor raised further questions, Zou claimed that he had authorized the use of the funds to purchase a property to serve as an office and temporary housing for RINO’s employees visiting the U.S. The auditor then went to RINO’s audit committee to raise concerns about the transaction because of the different explanations and the nature of the home. Zou and Qiu then agreed to reclassify the $3.5 million as a loan, and signed a promissory note bearing interest at current market rates. Zou and Qiu purportedly repaid the loan on May 10, 2010, using funds wired from a Chinese bank account to RINO’s U.S. bank account. That money was later wired back to an account in China.
The SEC’s complaint charges RINO, Zou, and Qiu with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. Without admitting or denying the allegations, RINO, Zou, and Qiu consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the securities laws. Zou and Qiu agreed to pay penalties of $150,000 and $100,000 respectively. They also paid the disgorgement amount of $3.5 million into a related class action settlement. Zou and Qiu consented to entry of an order prohibiting them from serving as officers and directors of a public company for 10 years. The settlement is subject to court approval.
The SEC’s investigation was conducted by Tom Swiers, Sarah Nilson, Kam Lee, and Melissa Hodgman of the SEC’s Cross Border Working Group, which focuses on U.S. companies with substantial foreign operations. Through the work of the Cross Border Working Group, the SEC has filed fraud cases involving more than 65 foreign issuers and executives, and deregistered the securities of more than 50 companies.