An Ontario-based consultant who specialized in bringing Chinese companies to North American stock exchanges using reverse takeovers has reached an agreement with the U.S. Securities and Exchange Commission, agreeing to pay $6.2-million (U.S.) to settle allegations of manipulative trading.
S. Paul Kelley of Oakville, Ont., and four of his associates were charged with conducting illegal reverse takeover schemes involving two Chinese-based companies, the SEC said Monday.
The SEC said the men bought dormant shell companies trading on U.S. exchanges and merged them with Chinese companies China Auto Logistics Inc. and Guanwei Recycling Corp. to get stock exchange listings for the foreign companies.
The SEC alleged Mr. Kelley hired stock promoters to tout the stock and that the group engaged in "various forms of manipulative trading" to drive up the price and volume of the shares, then profited when they dumped their own shares "into the inflated market they created."
The case, investigated in co-operation with the Ontario Securities Commission, demonstrates the concern of regulators in both countries about the use of dormant or shell companies as a vehicle for bringing Chinese-based companies to U.S. stock exchanges. The issue came to prominence in 2011 when investors began questioning disclosure at Sino-Forest Corp., which was the biggest Chinese-based company to list on the Toronto Stock Exchange. Trading in its shares was halted that year and senior executives of the companies were later accused of fraud by the OSC.
Although Mr. Kelley was not involved in the Sino-Forest case, an ROB Magazine feature in 2012 on reverse takeovers involving Chinese companies highlighted his prominent role in bringing at least 11 smaller Chinese companies to U.S. markets since 2004. The SEC case against him involves just two companies.
In his settlement with the U.S. regulator, Mr. Kelley agreed to pay $2.8-million to "disgorge" his gains from the trading, as well as a penalty of $2.8-million and $560,812 in interest.
Two of his U.S.-based associates, Roger Lockhart and Robert Agriogianis, also reached settlements with the SEC. Two others accused in the case – including Oakville, Ont.-based George Tazbaz – still have cases outstanding before the SEC.
The SEC said Mr. Kelley and his associates held a controlling interest in the shell companies merged with the two Chinese firms, but concealed their ownership stake by creating at least nine Hong Kong-based companies to hold the shares.
"Kelley and his associates concealed their acquisition and control of public shell companies, and they manipulated trading in two China-based companies following reverse mergers with those shells," Julie Lutz, director of the SEC Denver Regional Office, said in a statement Monday.