Several associates and former owners of Chinese plastics recycling firm Guanwei Recycling Corp. have been charged by the U.S. government in a scheme to “reap millions of dollars in illicit profits” by manipulating stock prices of the U.S.-listed company and illegally hiding their ownership.
The U.S. Securities and Exchange Commission May 5 said it filed charges accusing five people, led by investor S. Paul Kelley of Oakville, Ontario, of illegally conducting reverse mergers to take Guanwei and another Chinese company public in American markets.
SEC said that Kelley has agreed to pay more than $6 million in penalties, and a partner, Roger Lockhart, of Holiday Island, Ark., has agreed to pay more than $3 million, to settle the SEC charges. Under the terms of the settlement, neither admitted wrongdoing.
Executives for Guanwei, which is based in Fuqing City, Fujian province, have not been charged.
In a statement, Guanwei said it had not been accused of any wrongdoing and said “we have done our best from the start to conform with the regulations and responsibilities of being publicly traded in the U.S.
“We firmly believe that any wrongdoing that has had a negative effect on our shareholders should be pursued by the Securities and Exchange Commission,” Guanwei said.
SEC said that the plan began in 2009, when Kelley and his partners in the Kelley Group reached a “secret oral agreement” with Guanwei management to pay all the costs for Guanwei's U.S. stock market listing, in return for ownership of about 30 percent of the resulting public company.
Kelley Group also agreed to pay all costs associated with keeping Guanwei a public company for two years, SEC said. The deal included buying out a shell company that was already public to merge with Guanwei.
“Kelley and his associates concealed their acquisition and control of public shell companies, and they manipulated trading in two China-based companies following reverse mergers with those shells,” said Julie Lutz, director of SEC's Denver Regional Office, in a statement.
SEC alleges that Kelley Group hired stock promoters to tout Guanwei's shares and try to get it to a key $4 per share price needed to move from over the counter trading to a listing on the NASDAQ exchange. Kelley Group and its members did not file required SEC forms disclosing their ownership in Guanwei, according to SEC.
“The Kelley Group promised Guanwei's management that they would increase the price and volume of Guanwei's stock in order to facilitate the company's listing on NASDAQ,” SEC said. “Consistent with this promise, and as part of the larger scheme, the Kelley Group… engaged in manipulative trading of Guanwei stock from November 2009 through at least 2010.”
“The manipulative trading began almost immediately after the Kelley Group began receiving shares in the shell company, and continued until — and even after — the stock began trading on NASDAQ in April 2010,” the SEC said. “They profited when they dumped their shares into the inflated market they created.”
Kelley has been involved in taking at least 10 Chinese companies public in the United States since 2004, the SEC said.
He and his partners used a series of companies they controlled in U.S., Canada and Hong Kong to hide their ownership interest in Guanwei and the second company in the SEC complaint, China Auto Logistics Inc., a web-based auto trading platform, the SEC alleged.
Guanwei claims it is one of China's leading recyclers of low density polyethylene, with a capacity of 80,000 metric tons, at its plant in Fujian province.
In its most recent earnings report, it said sales from recycled LDPE declined 4 percent in 2013, to $64.81 million, mainly as result of difficulties caused by China's “green fence” restrictions on imported plastic scrap last year.
Guanwei said it's one of the few plastics recyclers in China to source most of its raw material from outside the country, primarily from Germany.
SEC said a third partner of the Kelley Group, Robert Agriogianis of Florham Park, N.J., also settled the agency's charges and agreed to cooperate in future litigation, with fines to be determined later.
SEC said that litigation continues against one of the stock promoters, Shawn Becker of Overland Park, Kan., and Kelley Group partner George Tazbaz of Oakville, Ontario.
