Broker/Dealer, Investment Advisor and Hedge Fund Fruad, Misrepresentation and Mismanagement Litigation and FINRA Arbtration Attorney, Russell L. Forkey, Esq.
Commission Freezes Accounts of Six Chinese Citizens and One Offshore Entity Charged with Insider Trading
The SEC recently announced that it has obtained a court-ordered freeze of the assets of six Chinese citizens and one British Virgin Islands entity charged with insider trading in Zhongpin Inc., a China-based pork processor whose shares trade in the U.S.
The SEC’s complaint, filed in U.S. District Court in Chicago on April 4, 2012 alleges the defendants reaped more than $9 million by trading in Zhongpin ahead of a March 27 announcement of a proposal to take the company private. The complaint names as defendants one entity, Prestige Trade Investments Ltd., and six individuals, Siming Yang, Caiyin Fan, Shui Chong (Eric) Chang, Biao Cang, Jia Wu, and Ming Ni. The SEC alleged that Yang formed Prestige in January and funded its U.S. brokerage account in March with $29 million transferred from a Hong Kong bank.
According to the SEC’s complaint, the seven defendants bought substantial quantities of common stock and call options in Zhongpin between March 14 and March 26. Zhongpin’s stock price jumped 21.8% on March 27 when the company publicly announced that its Chairman and CEO Xianfu Zhu had made a non-binding offer to acquire all of Zhongpin’s outstanding stock at $13.50 a share, a 46% premium over the previous day’s closing price.
“The defendants in this action – all with seemingly limited resources – suddenly and inexplicably purchased more than $20 million in Zhongpin securities just before an important public announcement,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “The SEC’s swift action to secure a judicial freeze order prevented millions of dollars from moving offshore.”
The SEC alleges that the purchases of Zhongpin stock and options were inconsistent with the defendants’ financial situations and prior investment behavior. In particular:
- The defendants’ trades made up a significant portion of the trading in Zhongpin between March 14 and March 26. Prestige’s purchases alone represented about 41% of the common stock trading in this period.
- Only one of the defendants had traded in Zhongpin before March 14.
- For most of the individual defendants, the purchases of Zhongpin securities equaled or exceeded their stated annual income and represented a significant portion of their net worth.
- Yang identified himself to his broker as an accountant in China with an annual income of $52,500 and a net worth of less than $250,000, when at the time he was a research analyst with a New York-based registered investment adviser.
- Each of the defendants placed at least some of their trades from computer networks and hardware that other defendants also used to place trades.
The SEC alleges that the defendants violated federal anti-fraud laws, namely Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The emergency court order that the SEC obtained on April 4 on an ex parte basis froze defendants’ assets held in U.S. brokerage accounts, grants expedited discovery and prohibits the defendants from destroying evidence.