Puda Coal entered the US capital markets through a reverse merger in July 2005. Puda Coal’s common stock was listed and traded on the NYSE Amex from September 2009 to August 2011.
The SEC alleged that the chairman (Zhao) embarked on the scheme with the CEO (Zhu) in September 2009 to enrich himself at the expense of Puda Coal’s public shareholders. Just weeks before Puda Coal announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao transferred Puda Coal’s 90 percent stake in Shanxi Coal to himself. In July 2010, Zhao transferred a 49 percent equity interest in Shanxi Coal to CITIC Trust Co Ltd., a Chinese private equity fund controlled by state-owned investment firm CITIC Group. CITIC Trust placed its 49 percent stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. Zhao caused Shanxi Coal to pledge 51 percent of its assets to CITIC Trust as collateral for a loan of RMB3.5bn (US$516m) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212bn preferred shares in the trust.
The transactions were not approved by Puda Coal’s board or shareholders and not disclosed in Puda Coal’s SEC filings. During the two Puda Coal public offerings in 2010, CITIC Trust was separately selling interests in Shanxi Coal to Chinese investors while Zhao and Zhu were still telling U.S. investors that Puda Coal owned a 90 percent stake in that company.
Zhao and Zhu continued their fraudulent scheme to deceive public investors even after the SEC began its investigation. Zhu forged a letter purportedly from CITIC Trust falsely stating that no funds had actually been loaned to Shanxi Coal and disclaiming any interest in Puda Coal’s or Shanxi Coal’s assets. Zhao’s counsel provided the forged letter to the SEC’s investigative staff and Puda’s audit committee. After Puda Coal disclosed the letter in an SEC filing and further misled shareholders about the ownership of Puda Coal’s assets, Zhu admitted forging the letter and resigned as CEO. Zhao remained the chairman.
The stock was delisted in 2011. The two executives were given penalties of US$250m. Macquarie was fined US$15m in 2015.
SEC: SEC Charges China-Based Executives with Securities Fraud, 22 Feb 2012
GeoInvesting: Business Analysis Report on Puda Coal, 8 Apr 2011
Alfred Little: Puda Coal Chairman Sells Half the Company; Pledges the Other Half to Chinese PE Investors, 11 Apr 2011
US District Court: Legal Document, 30 Jan 2011
Puda Coal: Annual Report 2010