Did China-Based Company Manipulate Its Stock?

AutoChina International Limited and 11 investors, including a senior executive and director at the China-based firm, have been charged with conducting a market manipulation scheme to create the false appearance of a liquid and active market for AutoChina’s stock. 

According to the SEC’s complaint, AutoChina senior executive and director Hui Kai Yan, a former AutoChina manager, and others fraudulently traded AutoChina’s stock to boost its daily trading volume. Starting in October 2010, the defendants and others allegedly deposited more than $60 million into U.S.-based brokerage accounts and engaged in hundreds of fraudulent trades over the next three months through these accounts and accounts with a Hong Kong-based broker-dealer. The allegedly fraudulent trades included matched orders, where one account sold shares to another account at the same time and for the same price, and wash trades, which resulted in no change of beneficial ownership of the shares. According to the complaint, AutoChina and the other defendants engaged in the scheme after lenders offered AutoChina unfavorable terms for a stock-backed loan due to low trading volume in its stock.
 
“AutoChina and the other defendants engaged in a brazen manipulation of AutoChina’s stock to obtain favorable loan terms,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The SEC will hold accountable publicly-traded companies, including foreign companies, that violate the U.S. securities laws and disrupt the U.S. capital markets.”
 
The SEC alleged that in the three months before the defendants opened the U.S.-based brokerage accounts, the average daily trading volume of AutoChina’s stock was approximately 18,000 shares. From November 1, 2010 through January 31, 2011, the average daily trading volume increased to more than 139,000 shares. On some days, the defendants and related accounts’ trading accounted for as much as 70 percent of the trading of AutoChina’s stock, according to the SEC.
 
According to the SEC’s complaint, several of the defendants are related to AutoChina’s Chairman and Chief Executive Officer, who at the time of the scheme owned more than 57 percent of the company. Three of the defendants are siblings of AutoChina’s Chairman and Chief Executive Officer and another is married to one his siblings.
 
The SEC’s complaint charges AutoChina; Hui Kai Yan; Rui Ge Dong; Victory First Limited; Rainbow Yield Limited; Yong Qi Li; Ai Xi Ji; Ye Wang; Zhong Wen Zhang; Li Xin Ma; Yong Li Li; and Shu Ling Li with violating Section 17(a) of the Securities Act of 1933, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint further alleges that Rui Ge Dong; Victory First Limited; Rainbow Yield Limited; Yong Qi Li; Ai Xi Ji; Ye Wang; Zhong Wen Zhang; Li Xin Ma; Yong Li Li; and Shu Ling Li aided and abetted AutoChina’s violations of Section 17(a) of the Securities Act of 1933, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.