NEW YORK (TheStreet) -- The investigation of a pump-and-dump scheme by federal authorities has spurred regulators to kick a Chinese reverse-merger company out of the United States.
On Friday, the
Securities and Exchange Commission
China Digital Media
( CDGT) as part of a settlement deal between the company and securities regulators.
According to court papers, China Digital Media's stock became
orchestrated by a number of American stock promoters, Chinese businessmen and purveyors of email spam, five of whom pleaded guilty to federal criminal fraud charges in June 2009. A grand jury in Detroit indicted another alleged conspirator on fraud charges unsealed in federal court last week.
Also last week, a
in a Michigan federal court sought to punish three companies and eight individuals, including company insiders as well as stock promoters. Among the people accused of pump-and-dump fraud in the SEC suit were Chi Shing Ng, who also goes by Daniel Ng, the CEO of China Digital Media, who wasn't indicted on federal criminal charges.
The cases began with an FBI investigation that started several years ago, apparently when the bureau began looking into the use of spam email to market the shares of micro-cap companies listed on the Pink Sheets or the over-the-counter bulletin board.
The suit filed by the SEC comes as the agency continues with a probe into fraud allegations that have beset the Chinese small-cap world. The agency is examining both individual companies as well as the gatekeepers who help find and bring Chinese businesses to U.S. capital markets through the reverse-merger process, including promoters, investment bankers, auditors and law firms.
The stocks named in the SEC's complaint are highly illiquid, and differ by an order of magnitude from the relatively well-capitalized Chinese stocks that are now drawing negative attention from short-sellers, the media and others. Those stocks trade on major exchanges such as
and Amex, having uplisted from the Pink Sheets and OTCBB.
But there are some connections between the bigger reverse-merger names and the penny stocks. Based in Kowloon, a district of Hong Kong, China Digital, which purports to offer cable-television "operational support services" in the People's Republic, completed its reverse merger in early 2005. At the time, its auditor was Jimmy C.H. Cheung, who has performed audit services in the past for a roster of better-known Chinese reverse-merger companies, including
China Education Alliance
China North East Petroleum
China Digtal Media was joined by a handful of other micro-cap reverse-merger stocks as part of the scam, according to the SEC. They include
, which says it's a drug developer based in the city of Xi'an in China; three now-delisted outfits called
Global PeopleLine Telecom
China World Trade
; and an Israeli penny stock called
, which says it's a software provider.
All of the stocks were dual-listed on the Pink Sheets and the over-the-counter bulletin board, or OTCBB.
Like China Digital, both Global PeopleLine and Score One were named as defendants in the SEC suit. For all intents and purposes, the shares of those two companies no longer trade, but their stock-registrations with the SEC face revocation, according to an administrative order filed by the commission on Friday. The order cited delinquent financial reports for the action, rather than any part played in the pump-and-dump scheme.
Along with three others, Daniel Ng, China Media's CEO, agreed to settle with the SEC without admitting or denying guilt. Under the terms of that settlement, the SEC barred Ng from acting as an executive or director of a public company in the U.S., and from participating in the offering of a penny stock. China Digital also agreed to disgorge $200,000.
In its civil suit, the commission alleged that Ng and three insiders at other reverse-merger companies had participated in the pump-and-dump. The insiders were accused of "coordinating the release of corporate news with the spam email campaigns, paying for the promotion through the sales of their own stock, and by issuing purportedly unrestricted shares of stock to themselves and the promoters, or nominees of the promoters, in order to dump those shares into the market," the SEC complaint said.
As described by the SEC in the complaint, the pump-and-dump scheme was classic in its execution. A Los Angeles stock promoter named Francis Tribble, along with the CEO of China World Trade, How Wai Hui, "masterminded" the pump-and-dumps of most of the stocks named in the suit, the SEC's court papers said.
Tribble and Hui found the private companies in China, arranged for their reverse mergers into U.S. shell companies with stocks still registered in the U.S., and then promoted the new shares of these Chinese businesses with email marketing campaigns, the complaint said.
Tribble and the Chinese insiders controlled the companies' share float through nominee holders. They could, therefore, rig trading in the stock. The emails contained falsely buoyant information and "baseless price projections," the SEC complaint said, and were designed to drum up interest from retail investors. As the share prices spiked, the alleged scammers would then sell their equity into the promote -- the dump phase of the ploy.
To execute the spam campaigns, Tribble even reached out to Alan Ralsky, "the self-proclaimed 'King of Spam,' " according to the SEC suit. Rasky pleaded guilty to federal criminal fraud charges in June 2009.
The scam netted $33 million in total profits for the conspirators, according to court papers.
Tribble and Hui are now serving prison sentences of more than four years, having pleaded guilty to the federal criminal charges in 2009.
-- Written by Scott Eden in New York
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