A*L Scores Again: SEC Charges SinoTech Energy with Fraud

On February 22, 2012 the SEC charged Puda Coal’s chairman with fraud (link here), confirming each of the allegations in a report (link here) published on A*L on April 8, 2011. On August 16, 2011, A*L blew the whistle exposing the massive fraud at Sinotech Energy (CTESY.PK) in a report titled “SinoTech Energy: Enhanced Oil Recovery or Capital Extraction” (link here).  Unlike other numerous RTO frauds, Sinotech was a $120 million IPO listed on NASDAQ underwritten by UBS and Lazard Capital Markets that raised in total $168 million from investors and was audited by E&Y.

Proving that A*L was right once again, on April 23, 2012, the SEC charged Qinzeng Liu, SinoTech’s chairman and controlling shareholder, with securities law violations after he admitted to:

“… secretly siphoning at least $40 million from a SinoTech bank account in the summer of 2011. He then stood silently by as SinoTech – attempting to counter negative Internet reports that the company was potentially fraudulent – falsely assured investors that the company had that money and more in the bank.”

The complaint asserts that in SEC filings, SinoTech management:

“… represented that the company had purchased 16 LHD units worth $94 million. In fact, the company only acquired 11 such units worth less than $17 million.”

The SEC’s valuation of SinoTech’s LHD units affirmed our contributor’s conversation with Radial Drilling Services, a competitor, who estimated “an LHD unit should cost between only $300-700k depending on ‘bells and whistles’ installed, be it shallow or deep well units.”

According to the SEC, in order to hide the $77 million difference in the equipment cost, SinoTech tried to get its equipment supplier to make false statements supporting the inflated purchase prices.

Furthermore, the SEC stated that SinoTech “continued to materially misrepresent the value of its equipment – and by extension the company – in numerous filings and press releases following its November 2010 IPO.”  The SEC’s press release and link to the full complaint can be found (here).

The SEC’s complaint validates our report’s conclusion that SinoTech used an import agent to inflate LHD unit cost while funneling shareholders’ cash out of the public company.  Where did the $77 million SinoTech overpaid for LHD units go?

SinoTech was the 7th fraud exposed by A*L and proves again the valuable service that short sellers provide to the market (as explained by “Alfred Little” here).

A*L continues to fight to defend the First Amendment free speech rights of its contributors who bravely exposed fraud and corruption committed by more than a dozen Chinese U.S. listed companies.

The continuing mission of A*L is to bring Chinese companies that have threatened our contributors’ lives, free speech and privacy to justice.  As such, A*L and its contributors continue to offer their full assistance to the SEC and other regulators.  A*L currently only publishes reports on Chinese companies that continue to attempt, through threats, kidnappings, physical violence or abuse of legal process, to silence their critics.

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Glenn Chan's Random Notes on Investing

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