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Sunday, May 19, 2024 | Back issues
Courthouse News Service Courthouse News Service

SEC Fines Chinese Company $1 Million

WASHINGTON (CN) - China-based Keyuan Petrochemicals, formed by a reverse merger, will pay $1 million to settle accounting and disclosure violations, including hiding bribes to Chinese officials, the SEC said in court .

The SEC sued Keyuan and its former CFO, Aichun Li, in Federal Court.

"Between May 2010 and January 2011, in what was its first year as a U.S. public company, Keyuan systematically failed to disclose in its SEC filings numerous material related party transactions between the company and its CEO and controlling shareholders, entities controlled by or affiliated with these persons, and entities controlled by Keyuan's management or their family members," the SEC said in its complaint.

"The related party transactions took the form of sales of products, purchases of raw materials, loan guarantees and short term cash transfers for financing purposes.

Aichun Li ('Li'), Keyuan's CFO, who was hired to ensure the company's compliance with U.S. Generally Accepted Accounting Principles ('GAAP') and oversee the SEC reporting process, received information indicating that the company's CEO and controlling shareholders guaranteed loans for the company. Li also encountered red flags that should have indicated to her that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed off on Keyuan's registration statements and quarterly reports that failed to disclose material related party transactions, as required by U.S. GAAP and/or Commission regulations.

"Keyuan also operated an off-balance sheet cash account that was kept off the company's books by Individual A, the company's then-Vice President of Accounting. The account was used to pay for various items, including cash bonuses for senior officers, fees to consultants who provided technical advice to the company, and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment. The account was also used to fund gifts - both cash and non-cash - for Chinese government officials. As a consequence of the use of the off-

balance sheet cash account, the company's reported balances in its financial statements for cash, receivables, construction-in-progress, interest income, other income, and general and administrative expenses were misstated."

Keyuan agreed to pay a $1 million fine and Li, of North Carolina, to pay $25,000, the SEC said.

In a reverse merger, a company, such as Keyuan, buys an empty corporate shell and uses it for its own purposes. This enables it to duck some SEC registration requirements. Reverse mergers have been a popular way for Chinese companies to get a foothold in the United States. Many of them in recent years have faced lawsuits from shareholders and regulators.

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