Huakang “David” Zhou and his firm, Warner Technology and Investment Corporation identified more than 20 private companies in China and helped them gain access to U.S. capital markets. Zhou then turned around and violated a slew of securities laws ranging from failing to disclose certain holdings to outright fraud.David imigrated to the U.S. from China in 1983 and earned a Ph.D. in Operations Research from Polytechnic University of New York in 1989.
Peter Zhou, Son of David was engaged in insider-trading and sold unregistered securities while assisting in the company’s reverse merger. He agreed to pay more than $73,000 to settle the charges in the case of China Yingxia.
The Securities Exchange Comission is investigating accounting irregularities at U.S. listed Chinese companies as many US listed Chinese companies started disclosing auditor resignations or bookkeeping problems.
Some were involved in reverse mergers in which the Chinese companies merged with U.S. shell companies. Others entered the public markets through initial public offerings.
Modus Operandi of Reverse Merger Frauds
Zhou would identify private companies in China through various sources (including government contacts), perform some due diligence (which was, on occasion, outsourced to individuals in China), and enter into an agreement with the private Chinese company to conduct a reverse merger, raise capital, and facilitate listing on a US stock exchanges. After completing the reverse mergers, Zhou strongly influenced, many of his clients’ to be a public company and have a U.S. presence.
Zhou facilitated the hiring of U.S. service providers, including accountants and lawyers; as well, he facilitated the appointment of senior officers and directors; and he assisted with the companies’ filings with the Commission.
Further, Zhou opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and to receive any proceeds from fundraising done in the U.S.
Zhou, and to a lesser extent his wife, were typically the only persons with signatory authority on his corporate clients’ bank accounts.
Company A, a supposed refiner and producer of high purity tellurium for the solar industry, is a Delaware corporation with purported operations in China. Its stock was quoted on the OTC Bulletin Board. Zhou and Warner Investment brought Company A.
The Holding Company was incorporated in late 2007 in Delaware with Zhou’s wife as its sole stockholder. The Holding Company became the holding company of a private Chinese company, which Zhou merged into the Holding Company.
Zhou subsequently merged the Holding Company with a shell company, and eventually Company A, the post-reverse merger company, soon became publicly traded in the U.S.