This week, the Securities and Exchange Commission announced that it had settled a securities violation with New Jersey and issued a cease and desist order — the first ever against a state. Ashby Jones at the Wall Street Journal says the SEC has more states in it sights over disclosures regarding weakened financies in the economic downturn over the last several years. Then he said the fact that the SEC didn’t even name the state treasurer or any one else who helped New Jersey’s bonds go to market in its order was disappointingto some people, and he singled out a comment from a former SEC accountant in a New York Times piece about the case: “There’s no fine, and no accountability on the part of any individuals.”
A recent Securities and Exchange Commission filing by the chief executive of China Fire & Security Group Inc. (Nasdaq: CFSG) has raised additional questions about disclosure by the company and its major shareholders.
Vyle Investment Inc., an entity headed by China Fire’s chief executive, Brian Lin, said in the filing that it transferred 1.83 million shares of its China Fire stock — worth nearly $27 million at the time — to two other parties, who in turn surrendered their 70 percent interest in Vyle.
Those shareholders were different than the ones that China Fire had previously listed as having an ownership interest in Vyle, which held a 9.2 percent stake in the company.
In addition, China Fire has never publicly announced the death of Gangjin Li, who was its founder, former chairman and biggest single shareholder. He
stepped down as chairman and CEO on March 30, citing ill health. According to a Chinese-language article posted on an industry news site, he died less than two weeks later at age 48. China Fire confirmed Li’s death to Sharesleuth.
An SEC filing earlier this year reported that Li had sole or joint ownership of more than 15.7 million China Fire shares, representing 57 percent of the total outstanding. It is unclear what became, or will become, of those holdings in the wake of his death. That could be significant for other investors if Li’s heirs decide to liquidate some or all of his shares.
China Fire said in response to written questions from Sharesleuth that stock-ownership filings by Lin, Li and another company executive were in compliance with SEC rules. It said other individuals and entities we asked about were not subject to disclosure requirements.
China Fire manufactures fire safety equipment and designs and installs detection and suppression systems for steel mills, power plants and other customers. The Beijing-based company’s shares closed Thursday at $7.18, giving it a market capitalization of $198.1 million.
China Fire’s stock has fallen by more than 50 percent since mid-May.
A HISTORY OF DISCLOSURE QUESTIONS
In March 2008, Sharesleuth published an investigation showing that some of the people listed as the beneficial owners of tens of millions of dollars worth of China Fire stock appeared to be fronts for the real holders. The company responded by releasing a revised list of the people it said held the true interests in those shares.
China Fire said at the time that Brian Lin held a 30 percent of the ownership interest in Vyle but had 100 percent of the voting power. The company said that a woman named Hui Bai, described as a “distant family member” but not a close relative of Lin’s, owned the other 70 percent.
China Fire’s annual filing with the SEC in March 2009 again said that Lin held a 30 percent ownership stake and 100 percent voting stake in Vyle, which is domiciled in the British Virgin Islands. But it listed Weishe Zhang, China Fire’s current chief technology officer, as having a 20 percent interest in Vyle. It did not identify the holder of the remaining 50 percent interest.
The most recent filing regarding the transfer of shares still listed Lin with a 30 percent interest in Vyle and Zhang with a 20 percent interest. It said that Famous Link Group Ltd. owned the remaining 50 percent.
China Fire did not identify the person or persons who control Famous Link. But SEC filings for two other Chinese companies listed on U.S. exchanges identify Ying Yueqin as having sole voting power for Famous Link Group, which like Vyle is incorporated in the British Virgin Islands.
Yueqin is Brian Lin’s brother-in-law. China Fire told Sharesleuth that because Yueqin is not a member of Lin’s immediate family and does not share a household with him, it was not required to disclose the relationship in its SEC filings.
Yueqin once was listed as the beneficial owner of 1.32 million China Fire shares held by Linkworld Venture Inc., yet another British Virgin Islands-based entity. China Fire said in the March 2008 press release intended to clarify ownership that the real holder of Linkworld’s shares was Zhao Shuangrui. It described Shuangrui as an early-stage investor in China Fire, and as the uncle of Gangjin Li.
Similarly, Brain Lin’s sister-in-law, Huiwen Liu, was originally listed as the beneficial owner of 2.58 million China Fire shares held by Worldtime Investment Advisors Ltd. (the family ties were not mentioned in that instance, either). Prior to the company’s disclosure of the true owner of those shares, Worldtime filed to sell stock with a market value of roughly $9.6 million.
China Fire also insisted in March 2008 that Gangjin Li’s son, Ang Li, was the beneficial owner of 2.67 million shares held by an entity called China Honour Investment Ltd. The son, who at the time was a teenager living in Canada, told Sharesleuth he did not know how he came to own the stock.
Last year, China Fire said in a filing that Ang Li had signed that stock, then worth $30 million, back to his father for no financial consideration.
China Fire told Sharesleuth that Zhang and Famous Link acquired their stakes in Vyle in January 2009. That transaction, which would have involved a holder of more than 5 percent of the company’s shares divesting that interest, was not disclosed in any SEC filing.
China Fire said Zhang properly disclosed his stock holdings in an SEC filing in March 2009. However, Zhang’s filing made no mention of his involvement with Vyle or his partnership with Lin and Famous Link. China Fire noted that it disclosed Zhang’s ties to Vyle in its annual report that same month.
China Fire explained its lack of disclosure regarding Gangjin Li by saying that he “had not been active” at the company since 2007, and only briefly resumed his role as chief executive in early 2010. China Fire added that, after Li’s health worsened and he stepped down as both chairman and CEO, he submitted an SEC filing showing that he had transferred of all of his holdings to the LGJ Family Trust.
“At the time of his death, Mr. Li was no longer a shareholder, director, or executive member of the company” China Fire said. “As such, the Board of Directors determined that it was not necessary to submit further filings with the SEC.”
But the filing that China Fire cited did not explicitly state that Li transferred all of his shares to the LGJ Trust. In fact, it showed that he had beneficial ownership and sole voting power over more than 15.7 million shares, and that the LGJ Trust had beneficial ownership and voting power over just 9.05 million of them.
To further confuse matters, the trustee for the LGJ Trust last month submitted an amendment to the original filing, withdrawing the trustee, LGJ Trust and another entity from that original filing, stating that none of them had any obligation to make disclosures through 13D or 13G filings.
The filing listed the holdings for all three entities at zero shares.
The cease and desist order, issued today, is the first ever by the SEC against a state. New Jersey agreed to settle the charges without admitting or denying any wrong doing, according to the agency. The SEC says the state misrepresented and failed to disclose to investors in billions of dollars worth of municipal bond offerings that it was underfunding the state’s two largest pension plans.
The 3rd Circuit Court of Appeals recently refused to revive most of the claims made by investors who sued the insurance company because they believed it made false statements about its supposedly “disciplined” investment strategy. The plaintiffs claimed the assurances were actually designed to enrich company executives at the expense of investors. The court said the statements were just forward looking and accompanied by the appropriate cautionary language — which means they were covered by Safe Harbor provisions in U.S. securities laws. The ruling upholds an earlier district court ruling. | More at Law.com
The two, Ronald and Reynold Mainse, aren’t accused of fraud, but the government of Ontario says they broke trading rules by failing to register before promoting two investment schemes to dozens of their friends and receiving over $250,000 (U.S) in commissions. The investments turned out to be little more than ponzi schemes masterminded by an American man named Gordon Driver. Driver settled charges with the SEC last year over the same scheme. The Mainse’s father, David Mainse, founded 100 Huntley Street, a Christian talk show akin to the 700 Club in the United States, in 1977. Crossroads Christian Communications Inc., the charity that runs the Toronto-based show, said the brothers were themselves victims of the scheme and were probably targeted by Driver because of their ability to reach trusting, Christian investors, according to the Globe and Mail. Crossroads said no donations from the public were ever invested.
Poker pro and former stockbroker Samuel McMaster Jr. pleaded guilty to 26 counts of securities fraud earlier this month in exchange for a chance to win his freedom, literally. A prosecutor in Arizona agreed that if McMaster could win enough money playing poker to pay back his victims, they won’t press for prison time. “McMaster has to make restitution payments of $7,500 a month for the next six months while he throws card in tournaments. If he’s not able to prove he’s got the poker skills he needs to make $440K, he’ll be back before the judge and off to jail he goes,” Kashmir Hill, at Above the Law, says. Prosecutors say McMaster sold half a million dollars in worthless promissory notes to unsuspecting investors, some who lost their life savings in the scam.
The idea is to undo the potential secrecy provisions in the recently passed financial reform Act, says Rep. Ron Paul (R-Texas), who introduced the bill on the heels of a Fox Business News report about a little-noticed section of the law that appears to give the SEC broad authority to withhold records. ”It is unfortunate, yet not unexpected, that legislation touted as fixing problems with the banking system actually makes them worse and provides more cover and power for organizations that failed us like the SEC and the Fed,” Paul said in introducing the bill. || Fox Business on the secrecy at the SEC