June 13, 2013 — When company officers make false claims in public stock offerings, it’s a crime. To help even the playing field in the battle against illegal investment fraud, the U.S. Congress created a whistleblower program as part of the Dodd-Frank Act of 2010. Informants who notify the Securities and Exchange Commission (SEC) about businesses that lie to investors or divert investor resources for private use may now be eligible for compensation for their courage in collaborating with the SEC. Tipsters may be rewarded with as much as thirty percent of the amount the government receives, so long as the information provided is unique and the government’s total recovery rises above $1 million.
Former Officers of Chinese Company Charged With Diverting Funds From Stock Offering
The U.S. Justice Department has charged Wang Hongjun, the former CEO and president of China North East Petroleum Holdings Limited (CNEP), and Chao Jiang, the company’s former vice president of corporate finance, with defrauding investors in connection with public stock offerings. CNEP is an oil and gas company whose shares are publicly traded in the United States. Though Hongjun and Jiang are both Chinese citizens, Hongjun lives in California and Jiang lives in New York.
In 2009 and 2010, Hongjun acted as the CEO and president of CNEP. In 2010, he became the chairman of the Board of Directors. Between 2008 and 2011, Jiang served as the corporate secretary and vice president of corporate finance. In June 2009, the U.S. Justice Department (DOJ) alleges, CNEP registered with the SEC so the company could sell up to $40 million worth of CNEP common shares on the New York Stock Exchange. Later that year, CNEP made two offerings based on the June registration. In SEC filings and other public statements, Hongjun and Jiang assured investors that CNEP would use the funds raised from the two securities offerings to repay a prior corporate debt and for general purposes related to the company.
After raising capital for CNEP through the public stock offerings, however, Hongjun and Jiang allegedly diverted around $1,265,000 of the funds for their own use. They are said to have wired about $300,000 to Hongjun’s wife and around $965,000 to Jiang’s father. The money that the two men told investors would be used by CNEP was spent instead on jewelry, a Mercedez and a house in California, claims the DOJ. When Jiang was questioned about the transactions by the SEC in Washington, D.C., he gave sworn, but false, testimony that his own family members had received nothing worth more than $500 from CNEP — despite the $965,000 wire transfer to his father.
As the DOJ is pursuing a criminal case against Hongjun and Jiang, the SEC is pressing a related civil enforcement action against the two men. If convicted of the securities fraud with which they are charged, the men could spend decades in the U.S. — in prison.
When Investors Are Defrauded, Whistleblowers Collaborate With the SEC
Company employees with knowledge about scams to defraud investors or divert funds for private use should learn how the Dodd-Frank whistleblower program functions before they notify the SEC. Informants who want to be anonymous, for example, must hire an attorney to act on their behalf — tipsters cannot contact the government directly. The SEC fraud attorneys at Waters & Kraus have the experience to safeguard your rights in investment fraud cases. Contact us by email or speak with our securities fraud lawyers at 800.226.9880 to learn what we can do to help you during this sensitive time.
