A unit of Macquarie will pay $15 million to resolve accounting fraud charges by the SEC that it underwrote a public offering for China’s Puda Coal; The case is the SEC’s first against an underwriter in its long-running crackdown on alleged accounting fraud by Chinese companies, many of whom entered the U.S. capital markets through backdoor mergers


Macquarie to Pay $15 Million in Puda Coal Case 

By Aruna Viswanatha

28 March 2015

Dow Jones Institutional News

WASHINGTON–A unit of Macquarie Group Ltd. will pay $15 million to resolve charges by the Securities and Exchange Commission that it underwrote a public offering for a China-based company even though it had information that contradicted statements in the offering materials.

The case is the SEC’s first against an underwriter in its long-running crackdown on alleged accounting fraud by Chinese companies, many of whom entered the U.S. capital markets through backdoor mergers.It is the latest in a series of cases the SEC has filed against so-called gatekeepers who helped Chinese companies gain access to U.S. markets, such as consultants, auditors and SHYfinanciers.

On Friday, the SEC also charged a former managing director of Macquarie’s U.S. unit, Aaron Black, and former investment banker William Fang for allegedly failing to exercise appropriate care in the due diligence review. Messrs. Black and Fang agreed to settle these civil charges, paying $200,000 and $35,000 respectively in penalties, but neither admitting to nor denying the allegations.

Mr. Black is now a managing director with Macquarie in Sydney.

Lawyers for the two men didn’t immediately respond to requests for comment. The wholly owned subsidiary involved in the case was Macquarie Capital (USA) Inc.

Australian-based Macquarie neither admitted to nor denied the allegations. “Macquarie takes its compliance and regulatory obligations very seriously, and has worked closely with the SEC to provide relevant information,” a Macquarie representative said.

Late Thursday, Macquarie sued the law firm Morrison & Foerster, which served as underwriter’s counsel on the deal at issue, seeking to recoup the cost of fighting a related investor lawsuit and the investigations. Macquarie described the law firm’s work as “egregious negligence” and said it “failed to carry out this most basic duty of underwriter’s counsel.” A spokeswoman for the firm disputed the allegations.

The case involves Puda Coal, a Chinese mining company that is no longer in business. In 2012, the SEC accused the company’s chairman and its chief executive of defrauding people into investing in what the SEC said was essentially a shell company.

Macquarie led a 2010 secondary public offering by Puda Coal, which traded on the New York Stock Exchange at the time. The SEC said Puda Coal told investors it held a 90% stake in a Chinese coal company, which Macquarie repeated in its marketing materials for the offering, despite having a report from Kroll Associates that showed Puda Coal didn’t own any part of the coal company.

The SEC said the report stated Puda Coal’s chairman had transferred ownership of the coal company to himself and sold part of the interest to a Chinese state-owned investment firm.

According to the complaint, Mr. Fang, 31 years old, received the report from Kroll and forwarded it to Mr. Black and other deal team members, 29 minutes later telling them, “No red flags were identified.”

“Underwriters are critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, who runs the SEC’s New York office.

In its lawsuit against Morrison & Foerster, filed in New York state court, Macquarie said the firm failed to examine whether Puda actually owned the subsidiary. It also accused the firm of obtaining, and ignoring, the same Kroll report. A spokeswoman for the firm said Macquarie never sought legal advice on the report.

According to the SEC, Macquarie also agreed to cover the costs of a fund to compensate Puda Coal investors.

The commission has filed more than 20 enforcement cases against Chinese companies and their officials, and more than 170 U.S.-traded Chinese companies have faced questions about their accounting or disclosure from regulators, auditors and investors over the past few years, according to a tally by The Wall Street Journal.

The SEC has also sought more evidence and audit documents from China in connection with the probes, entering into a settlement last month with the Chinese affiliates of the Big Four accounting firms designed to improve access to such documents.


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