Thad Davis and Michael Wong. (Jason Doiy)
A few years ago, short-sellers began to clamor about rampant alleged fraud among Chinese companies that got themselves listed on U.S. stock exchanges through a backdoor method known as a reverse merger. The claims sparked regulatory scrutiny and a raft of class actions, but this week the U.S. Department of Justice suffered a mistrial in one of its first criminal cases targeting a reverse merger company executive.
A federal jury in Washington, D.C., told a judge Monday that they couldn’t reach a consensus on whether a former executive of China North East Petroleum Holdings, Chao Jiang, misappropriated funds and lied to U.S. regulators. Having already ordered the jurors to keep at it once before during their weeklong deliberations, U.S. District Judge Richard Leon declared a mistrial at the request of Jiang’s lawyers at Gibson, Dunn & Crutcher. Earlier in the trial, Leon acquitted Jiang on two of the four counts of securities fraud that he faced.
Jiang is represented by Gibson Dunn partners Michael Li-Ming Wong and Thad Davis. “This was a long six-week slog,” Wong said of the trial. “I’m very grateful that after they threw everything they had at our client, he’s still standing.”
Jiang, a 33-year-old residing in New York, served as vice president of corporate finance for CNEP between 2008 and 2011. In 2009, CNEP raised about $40 million by selling common stock to investors. In offering documents, CNEP said the proceedings would be used to build the company and buy back debt.
In a 2013 indictment, prosecutors alleged that CNEP improperly wired $965,000 of the stock offering proceeds to Jiang’s father and $300,000 to the wife of CNEP’s CEO. According to the indictment, Jiang tried to cover up the misconduct in an interview with U.S. Securities and Exchange Commission investigators. Jiang initially faced four counts of securities fraud and two counts of false statements to the SEC. The former CEO, Wang Hongjun, was named as a codefendant. The SEC also brought a related civil enforcement action against Jiang and Hongjun.
At trial, Gibson Dunn’s Wong gave opening and closing arguments, while Davis cross-examined most of the government’s witnesses. They sought to persuade jurors that Jiang never concealed the transfer to his father, asserting that it was simply part of a loan repayment. “Nobody’s going to argue that sending money to your father from a company account is the best practice in the U.S.,” Wong told jurors during his opening statement. “The question is whether there’s proof beyond a reasonable doubt that there was intent to commit a crime to steal money here.”
It remains to be seen whether prosecutors will retry the case. The related SEC civil action, which is being litigated in New York, was stayed pending the outcome of the trial.
The cases are particularly important to the DOJ and SEC. The DOJ has devoted two trial attorneys in its criminal division to the case, as well as an assistant U.S. attorney in Washington. The SEC had hyped its parallel case as its top “cross-border enforcement highlight” during one of its SEC Speaks conferences.
Note: This story has been updated to reflect that on April 10 U.S. District Judge Richard Leon acquitted Chao Jiang on two counts of securities fraud.