Keyuan Petrochemicals Fraud
The SEC alleges that Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.
The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.
Keyuan, a China-based company headquartered in Ningbo, engages in business through its wholly-owned subsidiary Ningbo Keyuan Plastics. Chunfeng Tao, the Chairman and Chief Executive Officer of Keyuan, founded Ningbo Keyuan Plastics in 2007, along with his two business partners, Jicun Wang and Peijun Chen.
In April 2010, roughly six months after the plant began operations, Ningbo Keyuan Plastics , through various intermediate entities, consummated a reverse merger with a Nevada shell corporation that traded over-the-counter. As a result of the reverse merger, Ningbo Keyuan Plastics became the indirect wholly -owned subsidiary of the Nevada corporation, which was renamed Keyuan Petrochemicals.
What was the modus-operandi
Keyuan failed to disclose the related party transactions identified above in its registration statements and periodic reports filed between May 2010 and January 2011, as required by Commission regulations and/or U.S. GAAP.
From at least July 2008 and continuing until March 2011, Keyuan
maintained an off-balance sheet cash account. Total amounts funded to and disbursed from the account were approximately $1 million.The company’s CEO also received cash disbursements from the off-balancesheet cash account, including funds to cover business expenses (such as travel and entertainment) and to cover the costs of anapartment near the plant facilities.