[ by Larry Goldfarb ]

The SEC charged a New Jersey-based consultant with violating securities laws and defrauding some investors while helping Chinese companies gain access to the U.S. capital markets.  Huakang “David” Zhou and his consulting firm Warner Technology and Investment Corporation allegedly located more than 20 private companies in China to bring public in the U.S. - each through a reverse merger - and then committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.

SEC Findings and Allegations.   From at least 2007 to 2010, the elder Zhou engaged in varied misconduct ranging from non-disclosure of certain holdings and transactions to outright fraud - including the following scenarios: 

• He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and tp receive any proceeds from fundraising conducted in the U.S.  Zhou, thus was able to control how and when offering proceeds were wired to China, giving him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.

• Afer Zhou raised $2 million for client American Nano Silicon Technologies, he concealed from investors that their money would be put at risk due to the circuitous manner in which he purportedly sent investment proceeds to China.  Unknown to the investors, Zhou controlled a U.S. bank account for the issuer and sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who had no apparent affiliation with American Nano. 

• Zhou engaged in manipulative trading as part of his scheme to list China HGS Real Estate on a national exchange, including matched orders to meet the $4 minimum bid required for listing.  Through gifts of stock and a purportedly private sale to a broker-dealer, Zhou schemed to artificially create a sufficient number of shareholders to meet a listing requirement to have more than 400 “round lot shareholders” with 100 shares or more.  The scheme succeeded, and Zhou’s client was approved for listing on the exchange.

• Zhou engaged in unregistered sales of securities for several clients, including a $5 million offering to roughly 85 Chinese-Americans living in several U.S. states.  Zhou and his firm also improperly assisted with securities offerings for two clients while not registered as broker-dealers, and they aided and abetted violations by other unregistered brokers.

Alleged Violations Committed by Zhou and His Controlled Company.   Actions of the type allegedly taken by Zhou and Warner Technology and Investment Corporation would violate Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3, thereof.  In its complaint,the SEC further charges Zhou with control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b).

SEC Staff Credits.   Investigation by NYRO staffers: Celeste Chase, Eduardo Santiago-Acevedo, Osman Nawaz;  assisted by Frank Milewski.  Litigation will be led by Paul Gizzi and Mr. Nawaz.  FINRA assisted in the matter.

For more information, please read [SEC, 12/10/12].