WASHINGTON Feb 4 U.S. prosecutors on Tuesday
tangled with defense attorneys over how the Justice Department
is pursuing a fraud case against a former executive of a Chinese
reverse merger company, one of the first such criminal cases
Federal prosecutors have accused Chao Jiang, a former vice
president of China North East Petroleum Holdings, of
misappropriating corporate funds and lying to the U.S.
Securities and Exchange Commission about those funds.
On Tuesday, prosecutors sparred with Jiang's lawyers over
what evidence they might be able to present at trial, and
whether U.S. authorities had conducted an appropriate
The case is headed to trial next month, part of an effort by
U.S. officials to crack down on suspected fraud at U.S.-listed
The effort has been complicated in recent years by a lack of
access to foreign evidence.
The SEC has pursued dozens of cases against Chinese
companies that entered the U.S. capital markets through backdoor
mergers with U.S. shell companies and has delisted many for
failing to file accurate or timely reports, But it has run into
problems obtaining audit documents from China to pursue the
investigations further and build evidence of fraud.
China audit firms have resisted turning over that
information, citing Chinese secrecy laws.
In 2011, a top SEC official said the Justice Department was
similarly investigating accounting irregularities at Chinese
companies listed in the United States, but few criminal charges
have been filed since then.
The SEC has taken steps to force audit firms to assist in
its investigations, and an SEC administrative law judge last
month ordered suspension of the Chinese units of the "Big Four"
accounting firms over their failure to turn over the work
The United States has also undertaken efforts to negotiate a
diplomatic solution with Chinese authorities, and the head of
the Public Company Accounting Oversight Board, which regulates
auditors, is expected to comment on the issue on Wednesday after
an SEC meeting about the PCAOB's budget.
In the criminal case against Jiang, prosecutors and Jiang's
lawyers argued at the Tuesday hearing about whether they might
be able to present certain foreign evidence at trial, including
a deposition taken by the SEC of the company's auditor in Hong
Last May, a grand jury indicted Jiang, a U.S. resident, in a
case that involves wire transfers from an American bank account
and statements made to SEC investigators in Washington. The
indictment does not describe evidence obtained from overseas.
Jiang's lawyers have argued in court papers that the
government used irrelevant information in obtaining the
indictment, and did not present facts needed to back up a
securities fraud charge.
The oil exploration company, formed in 2004 through a
reverse merger with a U.S. shell company, was delisted from the
New York Stock Exchange in 2012.
In 2009, the company told investors they planned to use
funds from a stock offering for general corporate purposes and
to repay prior corporate debt.
Instead, prosecutors said Jiang and the company's chief
executive misappropriated $1.2 million of the proceeds by wiring
the money to family members who used the money to buy a home,
jewelry, and a car.
Prosecutors also accused Jiang of testifying under oath that
no family members had received anything valued at more than $500
from the company, even though some $965,000 had been wired to
But Jiang's lawyers argued in court documents that the
government had failed to provide any evidence that the money was
transferred for fraudulent purposes.
"For example, the payment of an employee's salary does not
suddenly become fraudulent based upon how the employee chooses
to spend his or her salary," his lawyers wrote.
"Mr. Jiang looks forward to his day in court," his attorney,
Michael Li-Ming Wong of Gibson, Dunn & Crutcher, said. A Justice
Department spokesman declined comment.
(Reporting by Aruna Viswanatha; Editing by David Gregorio)