Fraude En Inversiones Chinas

February 23, 2012
A Fraud Easy to Spot, but Wasn’t
By FLOYD NORRIS
Without a rule of law, investing is an extraordinarily hazardous undertaking.

The latest charges of fraud in a Chinese company traded in the United States were filed this week by the Securities and Exchange Commission against two former executives of a Chinesecoal company who the commission says stole and sold the company’sassets before they raised more than $100 million from public investors in the United States.

In some ways, the theft was not the most audacious part of the strange case of Puda Coal, which traded on the NYSE Amex stock exchange in New York. The attempted cover-up, involving a forged letter from a Chinese state-owned entity and a fake takeover offer, were even more brazen.

But what is mostamazing is how easy it turned out to be to discover the fraud. It was basically spelled out in documents that were publicly available in China months before American and Canadian investment banks, advised by major law firms, raised the money from investors. But it appears no one bothered to look — not the underwriters and not the auditors.

“They charge a lot for due diligence,” says the man whouncovered the fraud, Dan David, a 43-year-old money manager from Skippack, Pa. “But they don’t do it.”

At the same time Americans were investing money in the company, Citic Trust, a Chinese state-owned company, was selling investments in the same asset to Chinese investors, saying — evidently correctly — that it controlled the asset.

What the documents showed was laid out this week by theS.E.C. as it filed charges of civil fraud against Ming Zhao, Puda’s chairman, and Liping Zhu, the company’s former chief executive. Puda’s principal asset was a coal mining company, Shanxi Puda Coal. But in 2009, the chairman transferred that interest from Puda to himself. The next year, he sold a controlling interest in it to Citic.

Puda, which had gone public in the United States through amerger with a shell company in 2005, did not disclose those crucial facts when, in February 2010, it raised $12.8 million selling stock to American investors, in an offering underwritten by Brean Murray, Carret & Company of New York and Newbridge Securities of Fort Lauderdale, Fla. In December 2010 , a $100 million share sale was underwritten by Macquarie Capital, a Canadian firm, and Brean Murray.Investors in that offering paid $12 a share for stock that now trades for about 25 cents.

All told, the underwriters collected fees of $6.5 million, but they seem not to have acquired the documents that Mr. David said cost him $500. A spokeswoman for Macquarie declined this week to comment, and officials of the other firms did not respond to inquiries.

The fraud blew up last spring. On Friday,April 8, Mr. David posted his analysis on his Web site, GeoInvesting, and a similar analysis was posted on the Web site of Alfred Little, a firm that had a reputation for spotting Chinese frauds. That analysis was unsigned, but it was written by Andrew Wong, the head of the IFRA Group, a Hong Kong research firm.

“In contrast to most of the other Chinese frauds, where the business was not real,this was a profitable company that the chairman just stole,” Mr. Wong said in an interview this week. He said he had looked into the company after Mr. David asked him to review his own research.

“Incredibly,” Mr. Wong wrote in his report, “Puda’s auditor, Moore Stephens, failed to catch this theft of an entire company that is clearly documented in government ownership filings that any lawyercan obtain directly from the source.”

The stock plunged to $6 by the time the New York Stock Exchange suspended its trading on the following Monday. It would not trade again until it traded over the counter for two days in August, after it was delisted from the N.Y.S.E. The S.E.C. suspended it again. It trades now on the over-the-counter market.

The company’s audit committee investigated the...