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.
Attorneys at Gibson Dunn, a national firm with an extensive white-collar criminal defense practice, also aren’t aware of any other such case, said securities litigator Jonathan Dickey in its Palo Alto office.
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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.
Seattle’s own HQ Sustainable Maritime likewise shriveled up and was delisted after auditors balked at certifying its financials.
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.
Last fall short sellers published a detailed takedown of L&L, alleging precisely those kinds of misrepresentations by the company. But neither the federal prosecutors, nor the SEC in its parallel civil case against Lee, have addressed those allegations.
Taking those kinds of claims to trial would require evidence harder to obtain, because China has been reluctant to give outsiders access to financial documents of companies based there.
The simpler charges and more easily available evidence “does raise the chances of the government proving its case,” said Eric Chaffee, a University of Toledo law professor who writes the Securities Law Prof Blog and is not involved in the L&L case.
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. Aoki said he did not know whether it even has an attorney.
After the accounting firm Arthur Andersen was convicted as a company for its role in the Enron fraud and quickly collapsed, there was criticism that criminally charging the entire enterprise unfairly hurt its many innocent shareholders and employees.
Asked about that impact, federal prosecutor Friedman said that with L&L, “One, the stock price has fallen drastically already … so to some extent (shareholders) have already suffered the harm they are going to suffer.”
He added that there are “two sets of investors — those who already bought stock and those who might buy tomorrow. You are protecting investors as much as you are harming investors.”
And whatever the exact nature of the company’s coal mines, “those jobs are in China,” he continued. “The collateral consequences here are lesser than they would be” for a company with U.S. operations.
Ex-billionaire Blixseth delays Medina trustee sale
Medina resident and former Forbes 400 member Timothy Blixseth — who founded the posh Yellowstone Mountain Club and, according to several court decisions, later diverted more than $200 million from it — has sought bankruptcy protection for his waterfront home to halt a trustee sale.
The Chapter 11 case, though perhaps surprising in the wealthy enclave that Bill Gates and Jeff Bezos call home, is just one snowflake in the blizzard of litigation spawned by Blixseth’s tangles with creditors over his Montana development for the uber-rich.
The 5-bedroom, 6,000-square-foot Medina house is formally owned by Kawish LLC, which paid $7.9 million for it in 2007, according to county records. Kawish filed for Chapter 11 protection May 8, a day before the home was scheduled to be sold to satisfy a $590,000 debt.
Blixseth, who signed the bankruptcy filing, was ranked by Forbes in 2007 as No. 380 among the 400 richest Americans. Net worth $1.3 billion, the magazine said at the time, adding that a pending divorce might soon halve his fortune.
But since then litigation has sprung up all around him.
“The ongoing saga of the Yellowstone Club bankruptcy starting in 2008 is arguably one for the record books,” a federal judge in Montana wrote last month while affirming a bankruptcy court’s ruling that Blixseth owes certain Yellowstone creditors more than $40 million.
The judge, after noting that previous decisions in all that litigation “occupy literally hundreds of pages of text,” approvingly quoted from one such ruling that concluded “Blixseth had misappropriated Yellowstone’s cash and property for his personal use and his fraudulent intent in doing so ‘could not be more clear.’”
And there’s no sign that the legal morass is ending soon. A day before seeking protection for his home, Blixseth asked the 9th U.S. Circuit Court of Appeals to overturn last month’s ruling in Montana.
In an email this past week, Blixseth said he is in Europe. The Medina house, he wrote, “unfortunately has been owned by a small company involved in a dispute over tens of millions of dollars that is an indirect derivative” of the Montana litigation. “We are confident that dispute will be settled in the near future.”
Blixseth added that he still has “a multibillion dollar lawsuit pending” against lenders in the Yellowstone Club case, and “when a jury hears the facts, I will prevail.”
Rami Grunbaum: 206-464-8541 or email@example.com