Posted on May 19, 2014

Local China Firm Charged with Fraud

Rami Grunbaum, Seattle Times, May 17, 2014

Allegations of fraud at Chinese companies trading on the U.S. stock market have become commonplace in recent years, but federal prosecutors here say Seattle-based L&L Energy is the first to be charged with crimes.

The U.S. Attorney’s Office this month added L&L, the company, to the indictment for securities fraud the office unsealed in March against its founder and CEO, Dickson Lee.

“I believe this is the first company like that indicted in the United States,” said Andrew Friedman, chief of the office’s complex crimes unit.


L&L, which mines coal in rural southwestern China, can’t go to prison, of course.

But if found guilty on all seven counts, the company faces a maximum penalty of $25 million, said U.S. Attorney’s Office spokeswoman Emily Langlie.

That’s more than four times the net income L&L reported last quarter, and criminal penalties are typically not covered by corporate insurance policies.

The indictment underscores the number of Chinese companies much larger than L&L that have blown up after being accused of fraud, at much greater cost to their shareholders.

Sino-Forest, which traded on the Toronto Stock Exchange, cost investors more than $3 billion. Longtop Financial Technologies and Puda Coal are among the better-known cases where hundreds of millions of dollars in stock value evaporated after exaggerated profits, falsely claimed assets and other shenanigans were uncovered.


Some U.S.-listed China companies faced civil suits by regulators, and many were hit by shareholder lawsuits–37 in the peak year of 2011, according to NERA Economic Consulting of San Francisco.

So why is little L&L, whose market capitalization after it gained a Nasdaq listing in 2010 was never more than about $400 million, targeted for the dubious distinction of a criminal indictment?

The specific charges offer one explanation. Lee and L&L are accused of filing “false, fraudulent and misleading” SEC reports in 2008 and 2009 that said a Hong Kong resident identified as “N.L.” was L&L’s chief financial officer and had signed off on the company’s financial statements.

According to prosecutors, that person had declined to work for the company and “had nothing to do with L&L” at the time, and Lee was simply signing the financial reports and certifications himself.

Building a case to prove those allegations may be relatively straightforward because it doesn’t require evidence from auditors or employees on the ground in China.

Much more difficult are those situations where a Chinese company falsified assets, invented customers or otherwise fiddled the books.


Lee, who stepped down as L&L CEO after the indictment, has pleaded not guilty. His attorney, Russ Aoki, has argued in court filings that he should be released from pretrial detention because “without Mr. Lee’s assistance . . . L&L Energy may be unable to protect the company’s thousands of investors from irreparable harm because of the company’s inability to fulfill its commitments or continue operations.”

L&L, which was delisted from Nasdaq last fall, has not yet entered a plea in the criminal case. {snip}