The U.S. Securities and Exchange Commission has charged two China-based executives with defrauding investors into believing they were investing in a Chinese coal business when in fact they were investing in an empty shell company.

The SEC alleges that Puda Coal Inc.’s chairman Ming Zhao schemed with former CEO Liping Zhu to steal and sell Puda Coal’s sole revenue-producing asset, a coal mining company named Shanxi Puda Coal Group.

Zhao secretly transferred Puda Coal’s controlling interest in Shanxi Coal to himself and then sold a substantial portion to a fund controlled by what is reported to be China’s largest state-owned financial firm. The scheme enabled Zhao rather than Puda Coal’s public shareholders to profit from a lucrative business opportunity.

The SEC alleges that Zhao and Zhu failed to disclose these transactions in Puda Coal’s periodic reports to the SEC, and continued to raise funds from U.S. investors by conducting two public offerings to purportedly raise capital to enable Shanxi Coal to acquire coal mines.

Unbeknownst to investors, Puda Coal no longer had an ownership stake in that company after Zhao’s secret maneuvers. After the SEC began investigating, Zhao and Zhu further schemed to forge a letter from the Chinese financial firm purporting that Puda Coal investors weren’t harmed by the asset transfers.

In reality, the scheme left Puda Coal as a shell company with no ongoing business operations.

“Zhao and Zhu duped investors with promises that their money would be invested in a Chinese coal company when in fact the company was an empty shell that had been looted by the defendants,” says Robert Khuzami, Director of the SEC’s Division of Enforcement.

George S. Canellos, Director of the SEC’s New York Regional Office, says the massive fraud perpetrated by Zhao and Zhu wiped out hundreds of millions of dollars in shareholder value and was "compounded by their brazen obstruction of the SEC’s investigation."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Puda Coal entered the U.S. capital markets through a reverse merger in July 2005. Puda Coal’s common stock was listed and traded on the NYSE Amex from September 2009 to August 2011.