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SEC Files Case Against Chinese Company For Misrepresentations Regarding the Use of Its IPO Proceeds

Posted in Executive Officer Matters, SEC Enforcement Cases

On Monday, April 23, 2012, the SEC announced that it had filed a case against SinoTech Energy Limited, an oil field services company based in China, with intentionally misleading investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC also charged CEO Guoqiang Xin and former CFO Boxun Zhang for their involvement in the fraud. The Complaint, filed in federal court in Louisiana, alleges that the company’s IPO registration statement misled investors about the acquisition and value of a key asset lateral hydraulic drilling units ("LHD Units") that are central to its business. In addition, the SEC charged Qingzeng Liu, SinoTech’s chairman and controlling shareholder, with misappropriating at least $40 million of SinoTech’s cash between June, 2011 and August 2011.

According to the Commission, SinoTech filed an IPO registration statement with the Commission in November, 2010. It described itself as a fast-growing, non-state owned provider of enhanced oil recovery ("EOR") services to major oil companies in China, whose success derived from the use of lateral hydraulic drilling techniques. Its IPO included the sale of nearly 20 million American Depository Shares ("ADS") at a price of $8.50 per share, from which SinoTech raised more than $120 million. The Commission alleged that "SinoTech’s IPO registration statement represented, among other things, that the company would use funds raised in the IPO for two purposes: $51 million to repay a credit line used to purchase LHD Units, and $69 million to purchase additional LHD Units."

The Commission claimed that SinoTech did not use the IPO proceeds as represented, but instead obtained all of its LHD Units from a sole supplier located in Lake Charles, Louisiana. SinoTech contracted to purchase 15 LHD Units (for approximately $18.9 million), but only paid $16 million and only received 11 LHD Units. Moreover, after the IPO, "SinoTech overstated the value of its equipment in numerous filings and press releases."

The Commission also alleged that Mr. Liu, the Chairman of SinoTech, conducted in unauthorized transactions resulting in the withdrawal of approximately $40 million from SinoTech’s bank account (and subsequently confessed to making the withdrawal). The company did record the withdrawal in its books and records and retained Mr. Liu as Chairman despite his confession. The company attempted to hide the theft and rebut an Internet report alleging fraud in August 2011 by issuing a press release that contained false information regarding the company’s balance in its bank accounts.

The SEC’s complaint seeks permanent injunctive relief against all defendants, and disgorgement of ill-gotten gains by SinoTech and Mr. Liu, as well as civil penalties against the three individuals. The Commission also director-and-officer bars against each of the individual defendants. All three individuals are residents of China, which may complicate the Commission’s efforts to serve them.