CHINA BASED INSURER CHARGED BY SEC WITH FAILING TO IMPLEMENT PROPER INTERNAL ACCOUNTING CONTROLS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission ("Commission") today charged Keyuan Petrochemicals, Inc., a China-based issuer formed through a reverse merger in April 2010, with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The SEC further charged Aichun Li, Keyuan’s former Chief Financial Officer, with aiding and abetting Keyuan’s reporting and books and records violations and for failing to implement internal accounting controls. Keyuan and Li have agreed to settle the SEC’s claims against them.

According to the SEC’s complaint, between May 2010 and January 2011, in what was its first year as a U.S. public company, Keyuan systematically failed to disclose in its SEC filings numerous material related party transactions, as required by U.S. Generally Accepted Accounting Principles ("GAAP") and Commission rules and regulations. The related parties included the company’s three founding and controlling shareholders, including its current Chief Executive Officer, entities controlled by or affiliated with these persons, and entities controlled by Keyuan’s management or their family members. The related party transactions included sales of products, purchases of raw materials, loan guarantees, and short term financing.

Keyuan also operated an off-balance sheet cash account that was kept off the company’s books by the former Vice President of Accounting. The account was used to pay for various items, including cash bonuses for senior officers and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment. The account was also used to fund gifts—both cash and non-cash—for Chinese government officials. By failing to properly record these transactions on the company’s books and records, the company misstated its reported balances in its financial statements filed with the Commission.

The SEC further alleges that Keyuan’s then-CFO Aichun Li, a resident of North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.

The SEC’s complaint, which was filed in federal court in Washington, D.C., charges Keyuan with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"), Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 12b-20 and 13a-13 thereunder. The SEC’s complaint further charges Li with violations of Section 13(b)(5) of the Exchange Act and aiding and abetting Keyuan’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.

Without admitting or denying the claims against them, Keyuan and Li have consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Keyuan has agreed to pay a civil penalty in the amount of $1,000,000. Li has agreed to pay a civil penalty in the amount of $25,000. Li also has consented to the issuance of a Commission order, pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice, suspending her from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement is subject to approval by the court.