MANHATTAN (CN) - A New Jersey-based consulted illegally helped more than 20 Chinese companies enter the U.S. securities markets through reverse mergers, the SEC claims in court.
The SEC sued Huakang Zhou aka David Zhou and his company, Warner Technology and Investment Corp., in Federal Court. It claims he violated securities law in advising the companies and in taking operating roles in some of them.
"After earning millions of dollars in consulting fees, Zhou and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations," the SEC said in a statement announcing its lawsuit.
Reverse mergers are a favorite tool for Chinese companies, some of them shady, to enter U.S. stock markets. In a reverse merger, a company buys an empty shell company, which has registered, then takes it over, thereby skirting registration for whatever it is the buying company claims to do.
The SEC has sued several companies and people in the China Yingxia deal, including Zhou's son.
"Zhou failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange," the SEC said in its statement. "Zhou also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City."
The SEC seeks an injunction, disgorgement and penalties.