Chinese Stocks and Securites Fraud in a Global Economy

FOR IMMEDIATE RELEASE
Del Mar, California, United States of America (Free-Press-Release.com) October 19, 2010 --

Del Mar, CA ( free-press-release ) October 18, 2010 - Chinese Stocks and potential for securites fraud in a global economy. On the surface, the story is just another example of business in the global age. The Chinese-born, California-based CEO of a U.S. company doing business almost entirely in China enters into a structured transaction with a Costa-Rica based investment firm, using 1.3 million shares of publicly traded (NYSE:CNAM) stock as collateral. But dig a little deeper, and the story becomes one of fraud, and how the global economy could be brought to its knees by individuals and companies intent on circumventing national laws and regulations.

The man at the center of this case is Kexuan Yao, the CEO and General Manager of China Armco Metals, Inc (“CNAM”). CNAM and its wholly owned subsidiary, Armco & Metalwise (H.K.) Ltd. (“Armco”), deal with metal and metal products, including the recycling of waste materials. While the company is by its own admission “U.S. based,” its customers are located almost entirely within China, and their suppliers include India, Nigeria, Brazil and Turkey. Being headquartered in the United States can, of course, bring numerous benefits, even for a company whose work is predominantly done elsewhere. But the average American could be forgiven for thinking that along with such benefits come the responsibilities of operating in the U.S.

One such responsibility would be to conform to U.S. law. The finances of American companies are regulated by the Securities and Exchange Commission (SEC), a regulatory body which has come under more strict oversight since the passing of the “Public Company Accounting Reform and Investor Protection Act” of 2002, nick-named Sarbanes-Oxley for its co-sponsors. That act was passed to protect investors from the unscrupulous accounting practices engaged in by companies such as Enron, Adelphia, and WorldCom. In short, Sarbanes-Oxley was meant to force companies to be more transparent in their accounting and eliminate fraud.

There is no question that what Yao and perhaps his entire company’s Board of Directors engaged in was the kind of fraud Sarbanes-Oxley sought to eliminate. There is also no question that Sarbanes-Oxley, while a major deterrent to fraud, has not stopped people like Yao from trying to make money behind the backs of investors. What is at issue in this case is whether language and cultural barriers will become a new legal defense.

In the spring of this year Yao approached an intermediary with a proposition. He sought to liquidate 1.3 million common shares of stock he owned in his company. This would represent a little under 9% of the company’s over 15 million outstanding common shares, valued at $3.97 on the NYSE as of October 13, 2010.

The intermediary, Ed Furman, got in touch with Costa Rica-based investment firm Crisnic Fund, S.A. Anthony Gentile, principal of the firm, signaled that Crisnic would be willing to enter into a structured transaction agreement using the 1.3 million shares as pledged collateral. The agreement could proceed on condition that the shares were unrestricted and available for trade.

Furman explained the situation to Yao, who was asked to provide a letter stating that the shares were indeed unrestricted, and confirming that applicable SEC regulations regarding the trades of large sums of stock from an officer of a publicly-traded company were followed. Yao apparently suggested to Furman that (http://www.scribd.com/doc/39302723)he had paid for such letters in the past, and expected Furman to do so in the case of this transaction. Furman found an attorney in New York, J.S. Barkats, PLLC, who agreed to provide a letter stating that the shares could have any legend of restriction removed and were available for trade en masse. He would do so based solely on a letter from Yao.

Yao confirmed to Barkats in a signed letter that the (http://www.scribd.com/doc/39303026)1.3 million shares in question did not exceed either 1% of the total outstanding company stock or the greater of either 1% or the average daily trading volume on the NYSE in the four weeks preceding the agreement. Based on this information alone, Barkats issued a legal opinion that the stock could have any legend on it lifted and could be used in an unrestricted manner. The legal opinion clearing the transfer of stock titles was written on June 25, 2010.

But in the meantime Yao had already signed before a notary a structured transaction agreement with the investment firm, Crisnic. In the agreement notarized June 21, 2010 Yao assigned to Crisnic all control over the 1.3 million pledged shares, agreeing that Crisnic had absolute privilege to treat the stock in any way it saw fit, including selling the stock outright.

###

newswire     Newswire Social Network     SOCIETY