SEC Charges New York-Based Brokerage Firm With Faulty Underwriting of Public Offering by China-Based Company

The Securities and Exchange Commission today announced charges against a New York-based brokerage firm responsible for underwriting a public offering despite obtaining a due diligence report indicating that the China-based company’s offering materials contained false information.

Macquarie Capital (USA) Inc., a wholly owned subsidiary of global financial services firm Macquarie Group Limited, has agreed to settle the SEC’s charges by paying $15 million and separately covering the costs of setting up a Fair Fund to compensate investors who suffered losses after purchasing shares in the public offering by Puda Coal.  The SEC previously charged the Puda Coal executives behind the offering fraud at the company, which is no longer in business.

“Underwriters are critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Macquarie Capital proceeded with this offering despite a due diligence process that exposed a false claim by Puda Coal, and investors suffered massive losses when the truth publicly came to light.”

The SEC also charged former Macquarie Capital managing director Aaron Black and former investment banker William Fang for failing to exercise appropriate care in their due diligence review.  Black agreed to pay $212,711 and Fang agreed to pay $35,000 to settle the charges.

According to the SEC’s complaint filed in federal court in Manhattan, Macquarie Capital was the lead underwriter on a secondary public stock offering in 2010 by Puda Coal, which traded on the New York Stock Exchange at the time and purported to own a coal company in the People’s Republic of China (PRC).  In the offering documents, Puda Coal falsely told investors that it held a 90-percent ownership stake in the Chinese coal company.  Macquarie Capital repeated those statements in its marketing materials for the offering despite obtaining a report from Kroll showing that Puda Coal did not own any part of the coal company.  According to corporate registry filings in the PRC that Kroll accessed in its due diligence review, Puda Coal’s chairman had transferred ownership of the coal company to himself and then sold nearly half of his interest to the largest state-owned investment firm in the PRC.  As a result, Puda Coal no longer had any ownership stake or source of revenue.

According to the SEC’s complaint, Kroll provided its report to Fang, who read it but failed to act on the information revealing that Puda Coal no longer owned the coal company.  Instead, Fang circulated the report to other members of the Puda Coal deal team and stated in the e-mail that “no red flags were identified.”  Black, who served as one of the transaction directors on the Puda Coal deal, received the report from Fang and read portions stating that Puda Coal’s chairman owned 50 percent of the coal company of which Puda Coal was claiming to own 90 percent.  Black likewise failed to act on the information.    

The SEC alleges that Macquarie Capital made a net profit of $4.17 million as lead underwriter on the Puda Coal offering, which sold stock to investors at a price of $12 per share.  When reports about Puda Coal’s false claim appeared on the Internet based on the same PRC filings that Kroll Associates accessed for its report, Puda Coal’s stock price plunged as low as pennies per share.

The SEC’s complaint charges Macquarie Capital, Black, and Fang with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  They agreed to settle the charges and accept permanent injunctions without admitting or denying the allegations.  The settlement is subject to court approval.  In addition to the monetary penalties, Black has agreed to be barred from supervisory positions in the securities industry and Fang has agreed to be barred from the securities industry, both for at least five years.

The SEC’s investigation was conducted by Charu A. Chandrasekhar, George N. Stepaniuk, David Stoelting, and Sheldon Pollock of the SEC’s New York Regional Office.  The case was supervised by Sanjay Wadhwa.