Posted by CHEN Liting, Year 3 undergrad at the School of Accountancy, Singapore Management University
The Securities and Exchange Commission (“Commission”) filed a civil injunctive action today in the United States District Court for the District of Columbia charging China Valves Technology, Inc. (“China Valves”), its Chairman and former CEO, Siping Fang (“Fang”), its former CEO, Jianbao Wang (“Wang”), and its CFO, Renrui Tang (“Tang”), with misleading investors about the true nature and price of an acquisition and by mischaracterizing and materially overstating income related to its purchase and reverse engineering of a competitor’s product. Based on this and related misconduct, the SEC charged China Valves and the three senior officers with violations of anti-fraud provisions of the federal securities laws; China Valves with related violations of the reporting, books and records, and internal controls provisions of the federal securities laws; and Fang, Wang, and Tang with falsely certifying that China Valves’s filings contained no material misstatements and aiding and abetting China Valves’s violations of the reporting and books and records provisions. China Valves is a China-based U.S. issuer formed through a reverse merger in 2007.
The case is the latest from the SEC’s Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S. The Commission’s complaint alleges that China Valves, Fang, Wang, and Tang intentionally misled investors about China Valves’s 2010 acquisition of Watts Valve Changsha Co., Ltd. (“Changsha Valve”) in an effort to mask the subsidiary’s prior investigation of violations of the Foreign Corrupt Practices Act (“FCPA”) and China Valve’s decision to pay sales commissions to employees that potentially violated the FCPA. Among other things, China Valves and its officers fraudulently misstated or failed to disclose certain facts about the acquisition, including: (1) the purchase price, (2) the true seller, (3) the form of the acquisition, (4) the FCPA investigation, (5) the payment of commissions that the seller had declined to pay because of suspected FCPA violations, and (6) the role of related parties in the acquisition.
The complaint further alleges that, in 2011, China Valves materially overstated income and understated liabilities incurred by a wholly-owned subsidiary, Shanghai Pudong Hanwei Valve Co., Ltd (“Hanwei Valve”). Hanwei Valve purchased a valve with the plan to reverse engineer the product but, because of intellectual property concerns, intentionally disguised the payments for the valve in its books and records as Value Added Tax (“VAT”) payments purportedly made to the local tax authorities.
The Commission’s complaint alleges that China Valves, Fang, Wang, and Tang violated antifraud provisions of the securities laws in Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5(b). The complaint further alleges that China Valves violated reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Finally, the complaint alleges that Fang, Wang, and Tang falsely certified that China Valves’s filings contained no material misstatements in violation of Exchange Act Rule 13a-14, and aided and abetted China Valves’s violations of the reporting and books and records provisions.
The Commission also announced today the temporary suspension, pursuant to Section 12(k) of the Exchange Act, of trading in the securities of China Valves, at 9:30 a.m. EDT on September 29, 2014, and terminating at 11:59 p.m. EDT on October 10, 2014. Finally, the Commission issued an order instituting administrative proceedings to determine whether the registration of China Valves’s securities should be revoked for failure to make required periodic filings with the Commission.
The SEC’s investigation, which is continuing, was conducted by Sarah Nilson, Kelly Dragelin, and Janet Yang, and supervised by Melissa Hodgman. The litigation will be led by Alfred Day.