Yet another TSX-listed company with operations in China is in the spotlight after its former Chairman Michael Hu was fined $1.5 million and severely reprimanded by the British Columbia Securities Commission (BCSC) for illegal insider trading and making false statements to investigators.
A commission panel imposed the penalties after finding that Hu bought shares of Maple Leaf Reforestation Inc. (TSX: V.MPE, Stock Forum) in 2007 while in possession of undisclosed information about a biodiesel project that Maple Leaf was negotiating to acquire in the Xinjiang region of China.
He is being punished for illegal stock trades that occurred between September 24, 2007 and October 12, 2007 at an average price of 97 cents. The trades would have earned him a potential profit of $381,510, BCSC decision documents show.
News of the penalties comes just weeks after Maple Leaf issued a statement saying it does not endorse the target price set for its shares by “independent research provider” Marble Arch Research of Atlanta, Ga.
The company was referring to an October 17th research report that sets a target of 27 cents for its shares, which were trading at just 6 cents on Tuesday, giving the company a market cap of about $5 million, based on 80.6 million shares outstanding.
In a disclaimer in the footnotes, Marble Arch described itself as a third party research vendor and said it did not perform the research contained in the report.
Maple Leaf finds itself in the spotlight nearly six months after a short seller called Muddy Waters LLC claimed that Sino-Forest Corp. (TSX: T.TRE, Stock Forum) overstated the value of its timber assets in China and misrepresented its annual revenue. Before the report surfaced, Sino-Forest was trading at around $25. The stock has since tumbled below $2; it closed at $4.81 earlier this week.
Maple Leaf was incorporated in Canada in 2005 and operates via a wholly-owned China-based subsidiary, Inner Mongolia Maple Leaf Reforestation Ltd.
Under Chinese law, the subsidiary is a “wholly foreign-owned enterprise,” allowing Maple Leaf complete control over its operations and the repatriation of profits
Maple Leaf is hoping to raise between $3 million and $5 million to build a biodiesel plant in British Columbia to service Canadian and U.S. markets. The company’s key asset is a large greenhouse in inner Mongolia that specializes in the cultivation of tree seedlings – essentially feedstock for the biodiesel plant.
Raymond Lai, the company’s current chairman, president, ceo and director could not be reached for comment in Calgary and did not return a phone call from Stockhouse, the publisher of this report.
Given that the stock is trading at less than 10 cents, raising $5 million would seem to be a bit of a challenge, and would substantially dilute existing shareholders. In the quarter ended April 30, 2011, Maple Leaf posted a loss of $564,364 or $0.01 per share, compared to a year earlier loss of $535,591 or $0.01 per share. Revenue in the quarter was $41,520, down from $82,915 in the year earlier period.
Assuming that the amount raised is $3 million, Marble Arch said the number of Maple Leaf shares outstanding would increase to 96 million, and to 110.8 million on a fully diluted basis, substantially diluting existing shareholders in the process.
In early August the company said it signed a deal to acquire the assets of KS Ecology (Canada) Inc. (“KS”), a Vancouver company with Yellowhorn tree plantations and nurseries in China, for $2 million.
To satisfy the purchase price, Maple Leaf said it planned to issue 13.4 million common shares from treasury at 15 cents a share. The deal was expected to close on October 28. But closing has been delayed until January 27, 2012, following an agreement to extend the due diligence period. Maple Leaf has indicated that the deal may not proceed.
In a November 14 press release, the British Columbia Securities Commission was scathing in its description of Hu. He resigned from the company in 2008 and has not been involved with Maple Leaf since then, according to commission spokesman Richard Gilhooley.
Following a hearing in which Hu did not testify, the commission panel found that he made false and misleading statements to commission staff when he denied knowing the individual who held the online brokerage account that Hu used to make his illegal stock purchases.
Gilhooley said Hu opened an office for Maple Leaf in Vancouver, but used his own personal email address for his communications in relation to the company.
“Hu’s deliberate decision to trade on undisclosed material information, and to conceal that trading by using the account of a third party who would not be easily connected to him, shows a calculated contempt for the integrity of securities markets,” the panel said.
The $1.5 million administrative penalty includes $1 million for illegal insider trading, and $500,000 for misleading BCSC investigators and misconduct as a whole.
In addition to the fines, Hu is permanently prohibited, with limited exceptions, from purchasing securities or exchange contracts and acting as a director or officer of any issuer in B.C. He must also resign, with limited exceptions, any position he holds as a director or officer of any issuer in B.C
Hu is also permanently banned from becoming or acting as a registrant, investment fund manager, or promoter; he is permanently prohibited from acting in a management or consulting capacity in connection with the securities market, and he is permanently banned from investor relations activities.
A Google search indicates that Hu has a personal holding company, NAH Development Company Inc., of which he is the sole shareholder, officer and director. According to the company website, its head office is located on Burrard Street in downtown Vancouver.