The U.S. Securities and Exchange Commission (SEC) on March 27 announced charges that Macquarie Capital allegedly cost investors millions of dollars through their underwriting of a the public offering of Puda Coal, a fraudulent China-based company.

The charges allege that despite receiving a due diligence report showing the company to be a shell company a former junior investment banker at the firm, William Fang, sent an e-mail 29 minutes after reading the report indicating that “No red flags were identified.” The firm continued its equity raising efforts, selling $108 million in shares of Puda.

The shares became worthless through a series of transactions involving Ming Zhao, Puda CEO, who was charged by the SEC three years prior for taking the company’s 90 percent stake in Shanxi Coal, the sole source of Puda’s revenue, and then giving half of Shanxi Coal in equity interest to a private equity fund controlled by an investment firm owned by the Chinese government. While the equity fund sold its interests to Chinese investors, Puda was selling its shares, valued at 1 or 2 cents, to U. S. investors.

Puda is no longer in business and in December 2011 the stock was deregistered. Macquarie has agreed to a $15 million settlement payment, while neither admitting nor denying the allegations in the charges.

The complaint stated that Macquarie’s internal documents included that it had knowledge that “Chinese companies typically require higher levels of due diligence, given China’s regulatory environment” and that there were additional risk factors for Puda since it had gone public in 2005 in a reverse merger transaction.

“If a company’s financial reports seem too good to be true, they probably are, particularly for Chinese reverse merger companies,” wrote M. Norman Goldberger and Laura Krabill, in late 2011. “The old adage ‘buyer beware’ is particularly true.”

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Securities Enforcement and Litigation