Puda Coal scandal: SEC charges 2 executives with fraud

The US Securities and Exchange Commission has charged two executives from China’s Puda Coal Inc. with defrauding investors.

Puda began trading on the New York Stock Exchange in 2005, but was delisted last year, Reuters reported. The company’s shares now trade on the over-the-counter market.

In a civil suit filed in a Manhattan federal court today, the SEC alleged Puda chairman Ming Zhao, 39, and former Chief Executive Officer Liping Zhu, 55, tricked investors into believing they were buying shares in a Chinese coal business when in fact they were investing in an empty shell company, according to Bloomberg Businessweek.

Puda raised $116 million in two public offerings in 2010, attracting investors who wanted a piece of Puda’s profitable mining subsidiary Shanxi Puda Coal Group, Agence France-Presse reported. However, the SEC claimed, Zhao had transferred Puda's controlling interest in Shanxi Coal to himself a year earlier, with Zhu’s knowledge, Reuters reported.

Zhao then gave 49 percent of Shanxi Coal to Chinese investment group Citic in exchange for 1.2 billion preferred shares in a new coal investment fund created by Citic, the AFP reported.

"At the same time that Citic Trust was effectively selling interests in Shanxi Coal to Chinese investors, the defendants were still telling US investors that Puda owned a 90 percent stake in that company," the SEC charges said.

According to the AFP:

Puda was one of a number of Chinese companies that became traded on US markets over the past decade via backdoor listings – the company takes over another usually moribund firm already traded on the market. But many have produced more market scandal than profits.

Shares of Puda Coal fell 11 percent following the news, Bloomberg Businessweek reported.

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