The SEC alleges that ChinaCast Education’s former CEO Chan Tze Ngon illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50% ownership stake

SEC Charges China-Based Executives With Fraud and Insider Trading

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Washington D.C., Sept. 26, 2013 —

The Securities and Exchange Commission today charged the former CEO of an education services provider based in China with stealing tens of millions of dollars from investors in a U.S. public offering, and charged another executive with illegally dumping his stock in the company after he helped steal valuable company assets. The SEC alleges that ChinaCast Education Corporation’s former CEO and chairman of the board Chan Tze Ngon illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50 percent ownership stake.  From there, Chan transferred investor funds to another entity outside ChinaCast’s control.  Chan also secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast.  None of the transactions were disclosed in the periodic and other reports signed by Chan and filed with the SEC.The SEC further alleges that Jiang Xiangyuan, ChinaCast’s former president for operations in China, avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of company’s revenue-generating colleges before it was publicly disclosed by a new management team.  ChinaCast had a market capitalization of more than $200 million before these alleged frauds came to light.  After Chan and Jiang were terminated and their misconduct was publicly disclosed by new management, ChinaCast’s market capitalization dropped to less than $5 million.

“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in federal court in Manhattan, ChinaCast entered the U.S. capital markets through a reverse merger in December 2006, and its common stock was listed on the NASDAQ from Oct. 29, 2007 to June 25, 2012.  ChinaCast conducted multiple public stock offerings in the U.S., with the second one occurring in December 2009 when ChinaCast represented that the proceeds would be used for “working capital, future acquisitions, and general corporate purposes.”  Chan instead directed and engaged in the transactions that moved investor funds outside ChinaCast’s corporate structure for his personal benefit.  He did so without seeking or obtaining the approval of ChinaCast’s board of directors, and the transactions were not publicly disclosed until ChinaCast’s new management prompted the company to file a Form 8-K on Dec. 21, 2012, disclosing Chan’s misconduct.

The SEC alleges that ChinaCast falsely stated in multiple SEC filings signed by Chan that the company indirectly owned 98.5 percent of ChinaCast Technology (HK) Limited – the purported subsidiary to which Chan first transferred investor funds.  However, ChinaCast actually held only an indirect 49.2 percent interest while Chan personally owned 50 percent.  Chan also signed a number of periodic reports falsely stating that offering proceeds were under ChinaCast’s control and falsely including those funds in amounts that ChinaCast reported as cash and cash equivalents.  Chan also defrauded shareholders and prospective investors by secretly pledging ChinaCast’s existing term cash deposits as collateral to secure debts incurred by various third parties that had nothing to do with ChinaCast’s business.  Chan signed periodic reports falsely stating that ChinaCast’s cash and cash equivalents were completely unencumbered.

“Chan orchestrated the systematic looting of ChinaCast and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York office.  “Officers and directors who misuse their access to the U.S. capital markets will be held accountable for their insidious behavior.”

According to the SEC’s complaint, Jiang was a member of the senior management group headed by Chan.  Jiang engaged in illegal trading based on inside information by selling his shares on March 28, 2012, at $4.59 per share.  After Chan’s management group lost control of the board, they transferred ownership of ChinaCast’s three profitable brick-and-mortar colleges away from ChinaCast to Jiang and the dean of one of the colleges.  They were later sold to others.  At least one of the colleges was transferred to Jiang and the dean three weeks before Jiang’s March 28 stock sale.  Jiang was terminated on March 29, and NASDAQ suspended trading in ChinaCast on April 2 due to its failure to file an annual report for 2011.  ChinaCast was later delisted.  When over-the-counter trading resumed on June 25 after multiple disclosures made by new management about former management’s misconduct, the stock opened at 55 cents per share and closed at 82 cents.  ChinaCast’s stock is currently trading at 10 cents per share.

Chan is charged with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as violations of various corporate reporting, recordkeeping, and internal controls provisions.  Jiang is charged with illegal insider trading in violations of the same antifraud provisions.  The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, permanent injunctions, and officer-and-director bars.

The SEC’s investigation, which is continuing, has been conducted by Dominick Barbieri and George Stepaniuk in the SEC’s New York office.  The SEC’s litigation will be led by Nancy Brown.  Assisting in the investigation was the SEC’s Cross Border Working Group, which has representatives from each of the agency’s major divisions and offices and focuses on U.S. companies with substantial foreign operations.

SEPTEMBER 26, 2013, 8:52 PM

S.E.C. Sues Former Chairman in Looting of Educational Company

By ALEXANDRA STEVENSON

The Securities and Exchange Commission on Thursday accused the former chief executive and chairman of an American-listed Chinese education company of stealing $41 million from investors.

The ChinaCast Education Corporation, a company that provided postsecondary education services in China, began operating in the United States in December 2006 and later listed on the Nasdaq. It was a time when American investors were hungry to get a piece of China’s growth by investing in a flurry of Chinese companies listing on United States exchanges.

But in recent years, such companies have been the target of growing scrutiny as investors have lost billions of dollars. According to the latest complaint filed in federal court in Manhattan, ChinaCast’s former chairman and chief executive, Chan Tze Ngon, illegally transferred money from the company. The indictment also accuses Jiang Xiangyuan, a former president of ChinaCast’s China operations, of selling shares based on insider information.

Both men live in China, and it is unclear how they will answer the accusations. The S.E.C. has sued both men in civil court and is seeking disgorgement of ill-gotten gains and penalties.

It is the latest in a story that spans thousands of miles with a cast of hired muscle men, stolen corporate bank account details, and a bitter boardroom battle in which Mr. Chan was eventually ousted.

The company at one point was worth more than $200 million before any allegations of fraud were made. After Mr. Chan and Mr. Jiang left the company, it was worth just $5 million, the S.E.C. said.

“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, head of the agency’s New York office.

The company’s descent began late in 2011, when ChinaCast, under Mr. Chan’s leadership, accused Ned L. Sherwood, a director and one of the company’s biggest shareholders, of insider trading.

Mr. Sherwood denied the claims and mounted his own proxy campaign to bring three new directors to the board. He filed a complaint to a Delaware court, asserting that an “unidentified attendee” had taken over a critical board meeting, disqualifying Mr. Sherwood and his nominees. Eventually Mr. Sherwood was successful in bringing two new members onto the board and Mr. Chan was ousted in March 2012.

What came after confounded investors. In April 2012, a dozen men claiming to be associated with Mr. Chan stormed the company’s Shanghai office and violently removed computers from the company’s finance department, according to a regulatory filing in the United States. The company’s chops — official seals necessary to obtain bank account records in China — also disappeared, making it difficult for new management to go through the financial books.

The S.E.C.’s complaint on Thursday included accusations of a long list of misdeeds, potentially shining some light on the company’s real business since its debut on the Nasdaq in 2007.

“Chan orchestrated the systematic looting of ChinaCast,” said Sanjay Wadhwa, a director for enforcement in the S.E.C.’s New York office, “and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated.”

According to the complaint, Mr. Chan stole $41 million from a total of $43.8 million that ChinaCast had raised from investors. He is accused of then transferring the money into ChinaCast Technology, a subsidiary that Mr. Chan falsely claimed was controlled by ChinaCast. Instead, Mr. Chan personally owned a 50 percent stake, while ChinaCast had a 49.5 percent stake.

Mr. Chan also pledged $30.4 million of the company’s cash deposits to secure debts for unrelated entities, failing to notify shareholders or the board. During this time he signed reports that falsely claimed the company’s cash and equivalents were unburdened. “In hindsight, this certainly shows why Mr. Chan may have been so anxious to get rid of our client, Ned Sherwood,” said Barry R. Goldsmith, a partner at Gibson, Dunn & Crutcher.

The company was forced to delist from the Nasdaq after it failed to file its 2011 annual report.

Mr. Chan and Mr. Jiang were not immediately available for comment.