S.E.C. Sues Former Chairman in Looting of Educational Company

The Securities and Exchange Commission on Thursday accused the former chief executive and chairman of an American-listed Chinese education company of stealing $41 million from investors.

The ChinaCast Education Corporation, a company that provided postsecondary education services in China, began operating in the United States in December 2006 and later listed on the Nasdaq. It was a time when American investors were hungry to get a piece of China’s growth by investing in a flurry of Chinese companies listing on United States exchanges.

But in recent years, such companies have been the target of growing scrutiny as investors have lost billions of dollars. According to the latest complaint filed in federal court in Manhattan, ChinaCast’s former chairman and chief executive, Chan Tze Ngon, illegally transferred money from the company. The indictment also accuses Jiang Xiangyuan, a former president of ChinaCast’s China operations, of selling shares based on insider information.

Both men live in China, and it is unclear how they will answer the accusations. The S.E.C. has sued both men in civil court and is seeking disgorgement of ill-gotten gains and penalties.

It is the latest in a story that spans thousands of miles with a cast of hired muscle men, stolen corporate bank account details, and a bitter boardroom battle in which Mr. Chan was eventually ousted.

The company at one point was worth more than $200 million before any allegations of fraud were made. After Mr. Chan and Mr. Jiang left the company, it was worth just $5 million, the S.E.C. said.

“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, head of the agency’s New York office.

The company’s descent began late in 2011, when ChinaCast, under Mr. Chan’s leadership, accused Ned L. Sherwood, a director and one of the company’s biggest shareholders, of insider trading.

Mr. Sherwood denied the claims and mounted his own proxy campaign to bring three new directors to the board. He filed a complaint to a Delaware court, asserting that an “unidentified attendee” had taken over a critical board meeting, disqualifying Mr. Sherwood and his nominees. Eventually Mr. Sherwood was successful in bringing two new members onto the board and Mr. Chan was ousted in March 2012.

What came after confounded investors. In April 2012, a dozen men claiming to be associated with Mr. Chan stormed the company’s Shanghai office and violently removed computers from the company’s finance department, according to a regulatory filing in the United States. The company’s chops â€" official seals necessary to obtain bank account records in China â€" also disappeared, making it difficult for new management to go through the financial books.

The S.E.C.’s complaint on Thursday included accusations of a long list of misdeeds, potentially shining some light on the company’s real business since its debut on the Nasdaq in 2007.

“Chan orchestrated the systematic looting of ChinaCast,” said Sanjay Wadhwa, a director for enforcement in the S.E.C.’s New York office, “and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated.”

According to the complaint, Mr. Chan stole $41 million from a total of $43.8 million that ChinaCast had raised from investors. He is accused of then transferring the money into ChinaCast Technology, a subsidiary that Mr. Chan falsely claimed was controlled by ChinaCast. Instead, Mr. Chan personally owned a 50 percent stake, while ChinaCast had a 49.5 percent stake.

Mr. Chan also pledged $30.4 million of the company’s cash deposits to secure debts for unrelated entities, failing to notify shareholders or the board. During this time he signed reports that falsely claimed the company’s cash and equivalents were unburdened. “In hindsight, this certainly shows why Mr. Chan may have been so anxious to get rid of our client, Ned Sherwood,” said Barry R. Goldsmith, a partner at Gibson, Dunn & Crutcher.

The company was forced to delist from the Nasdaq after it failed to file its 2011 annual report.

Mr. Chan and Mr. Jiang were not immediately available for comment.