WASHINGTON (CN) - The SEC on Monday charged five men with illegally reaping millions of dollars in profits by taking two Chinese companies public through reverse mergers with U.S. public shell companies.
Lead defendant S. Paul Kelley, a Toronto consultant, is accused of running the "two nearly identical schemes" with help from three associates - George Tazbaz of Ontario, Canada; Roger D. Lockhart of Arkansas; and Robert Agriogianis of New Jersey - and stock promoter Shawn A. Becker, of Overland Park, Kan.
"From 2008 through 2012, the defendants engaged in two nearly identical schemes to illegally reap millions in profits by taking two Chinese companies, China Auto Logistics, Inc. ('China Auto'), and Guanwei Recycling Corp. ('Guanwei'), public through reverse mergers with U.S. public shell companies," the 55-page lawsuit states. "The defendants hid their control over the Chinese companies' stock through a vast network of U.S. and international entities, sold shares in unregistered distributions, and manipulated trading in the stock, ultimately obtaining millions in profits as a result of their schemes. The schemes were orchestrated by Kelley, in coordination with Tazbaz, Lockhart, and Agriogianis (collectively, 'the Kelley Group'), and an affiliated stock promoter, Becker."
In a reverse merger, a company buys an empty corporate shell and then sets up business, generally a business unrelated to whatever the first corporation claimed to be. It's a common way to duck securities regulations, and has been a common way for Chinese companies to enter the U.S. market.
The complaint continues: "The defendants' schemes regarding China Auto and Guanwei followed a similar pattern. The schemes began when the Kelley Group reached secret oral agreements with the management of China Auto and Guanwei that they would cover all of the companies' costs of going public in the United States, plus costs associated with the companies' securities remaining publicly traded for at least two years, in exchange for approximately 30 - 40% of the public companies' stock. The Kelley Group then acquired controlling interests in the stock of two publicly held U.S. 'shell' companies, which were used as the vehicles to bring China Auto and Guanwei public. Next, and consistent with their secret agreement, the Kelley Group paid for expenses on behalf of China Auto and Guanwei, including outside auditors, lawyers, and stock promoters, in order to prepare the companies to go public. The Kelley Group then structured reverse mergers between China Auto, Guanwei, and the respective shell companies, such that they initially controlled nearly all of the companies' shares that were available to be publicly traded - the 'public float' - but hid that control by directing that the stock be distributed to myriad entities that the Kelley Group controlled in the U.S., Canada, and Hong Kong, and by failing to file the required SEC reports. At times after China Auto and Guanwei's stock began publicly trading, the Kelley Group, acting in concert with Becker and other stock promoters, manipulated the trading of the stocks, artificially boosting the stock price and volume to help facilitate the listing of both companies on NASDAQ.
"Finally, after succeeding in taking China Auto and Guanwei public in the United States, the defendants sold millions of their shares in China Auto and Guanwei, and made millions in profits from their fraudulent schemes.
"From approximately June 2009 through at least December 2010, Tazbaz, Lockhart, and Becker also engaged in a separate scheme to artificially inflate the price and volume of the stock of a third Chinese company that members of the Kelley Group had previously taken public, Kandi Technologies Group Inc."
Kelley agreed to cough up $6.1 million and will be barred from the securities industry, the SEC said in a statement.
Lockhart will pay $3.1 million and Agriogianis agreed to cooperate with the SEC.
As is customary with the SEC, the men did not have to admit that they did anything wrong.
Litigation will continue against Tazbaz and Becker, the SEC said.