The Securities and Exchange Commission Wednesday charged husband-and-wife executives and their China-based company with FCPA books and records and internal controls violations in a non-bribery case. The couple allegedly overstated the company’s revenues and diverted proceeds from a securities offering for their personal use.
The SEC’s civil complaint charged Rino International Corporation’s chief executive officer Dejun ‘David’ Zou and chairman of the board Jianping ‘Amy’ Qiu with diverting $3.5 million in company money to buy a home in Orange County, California, without disclosing it to investors.
When questioned by Rino’s outside auditor, Zou and Qiu provided conflicting and false information.
They also bought cars, designer clothes, and accessories ‘without recording them as personal expenses or otherwise disclosing them in Rino’s public filings,’ the SEC said.
Rino makes environmental protection equipment for the Chinese steel industry.
Zou and Qiu agreed to settle the SEC charges by paying penalties of $150,000 and $100,000 respectively and disgorging $3.5 million into a related class action settlement. They’re barred for 10 years from serving as officers or directors of any company publicly traded in the U.S.
The couple didn’t admit or deny the allegations.
The SEC’s complaint charged Rino, Zou, and Qiu with violating the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The FCPA’s books and records and internal controls provisions are incorporated into the federal securities laws. They apply to all ‘issuers’ — U.S. public companies or those that file periodic reports with the SEC — and to their directors, officers, employees, and agents.
Prosecutors don’t have to allege violations of the FCPA’s anti-bribery provisions to bring charges under the accounting standards and internal controls provisions.
In March, the SEC brought a similar enforcement against another China-based company, Keyuan Petrochemicals Inc., and its former CFO, Aichun Li. The SEC’s complaint in that case also alleged violations of the books and records and internal controls provisions of the FCPA, and anti-fraud and reporting provisions of other federal securities laws.
The Keyuan complaint included factual allegations that the company maintained a $1 million off-the-books account that was used to buy gifts for Chinese government officials. But no bribery charges appeared in the SEC’s enforcement action.
The SEC issued a trading suspension against Rino in 2011 after Hong Kong-based Muddy Waters Research reported that the company had filed fraudulent financial statements. Rino later told investors through an SEC filing they couldn’t rely on audited financial statements for fiscal years 2008 and 2009.
The company, headquartered in Dalian, China, became a U.S. issuer through a reverse merger in 2007.
In the civil complaint filed Wednesday in federal court in the District of Columbia, the SEC alleged that:
Rino maintained two conflicting sets of financial records — one set of books for filings in China and another set of books for filings in the U.S. The Chinese books reflected sales of approximately $31 million from the first quarter of 2008 through the first three quarters of 2010. But the U.S. books that formed the basis for Rino’s SEC filings contained false contracts and portrayed sales revenues of approximately $491 million during that same time period — more than 15 times greater than the revenues recorded in the Chinese books.
The settlement needs still needs final approval from the court.
View and download the SEC’s civil complaint in SEC v. Rino International Corporation, Dejun “David” Zou, and Jianping “Amy” Qiu here.