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Republican Donors to Andrew Yang Are Under Investigation by the SEC
A Long Island City grocery chain shows that the Chinese reverse merger trend may be making a comeback.
Long Deng rings the opening bell as iFresh debuts on the NASDAQ in February 2017. Photo by Christopher Galluzzo/Nasdaq, Inc.
Engineered by China. Bankrolled by America. Escaped - unleashed? - from its country of origin to wreak economic devastation on a global scale. No no, not the novel coronavirus! The victor of that battle in the culture war is yet to be declared. I’m talking about fraudulent securities.
In 2017, the documentary film “The China Hustle” premiered at the Toronto Film Festival to widespread and well-earned acclaim. It tells the story of how hundreds of Chinese companies and their American fixers colluded to defraud investors of billions by misrepresenting the firms’ finances, inflating their stock prices, and cashing out before any evidence of their lies made it across the Pacific.
In the early aughts, a lot of Chinese companies wanted access to foreign investment, and a good way to get that is to be listed on an American stock exchange. The usual method of obtaining such a listing is to conduct an initial public offering. But doing an IPO on an American exchange requires submitting detailed financial records to public and regulatory scrutiny, potentially exposing weaknesses in the firm, or perhaps even unlawful activity. But there’s another method that avoids these perils: a reverse merger with a publicly traded American company.
A reverse merger is when Company A acquires Company B, but Company B is the entity that survives the transaction, only now with all the assets of both firms. So, defunct American companies with no real operations - but that were still listed on a stock exchange from back when they were still in business - would acquire a Chinese company through a reverse merger, and voila! The American firm essentially ceases to exist, and the Chinese one takes its place on the stock exchange, the most burdensome compliance obstacles avoided. Sounds like a vehicle for unscrupulous actors to commit runaway fraud? Of course it is, that’s why it’s legal!
In this case, the fraud was that after these companies went public, they drove up their stock prices by lying about how well they were doing. The fact that China can be difficult to physically access, its regulatory records are hard to obtain, and its press is heavily censored meant that most Americans were taking these companies’ claims of massive profits at face value. But eventually, the truth came to light as more sophisticated investors sunk considerable resources into vetting these firms’ financial statements. Many were delisted from American stock exchanges as a result, and the popularity of Chinese reverse mergers among investors diminished.
But this is Queens, baby - the world’s borough! We’re a global center of innovation and novelty, from the culinary arts to securities fraud. In 2019, a grocery chain based in Long Island City called iFresh put a new twist on the reverse merger two-step by trying to do one while still a fully functioning enterprise. It hoped to spin off its grocery business through a subsidiary - essentially going private again - and let a Chinese financial services firm take its place on the NASDAQ. Unfortunately, the deal fell apart when that firm’s top executives were all arrested by Chinese authorities for defrauding borrowers. Now iFresh is under investigation by the SEC.
Let’s take a look at this story in more detail, complete with this intriguing side plot: why are iFresh’s top executives all max donors to Andrew Yang, and why have over 30 other employees donated to his campaign too?
I. Ripe for the Picking
iFresh began as Strong America Ltd., a wholesaler that supplied food products to Chinese restaurants and grocery stores. Its founder was Long Deng, a man who emigrated from China to Queens in the early 1990s. In interviews and public appearances, he’s recounted the gratitude and hopefulness he felt as he stepped on to the terminal at JFK with little more than the few hundred bucks he had in his pants pocket. His career would soon vindicate that optimism. After a few years working construction, he decided to make use of his connections in China to break into the wholesale business. Later, he moved into retail, and opened the first location of his Chinese grocery chain, New York Mart, in 2001. Two decades later, Deng was a millionaire, an important figure in the New York Republican Party, and a lavish donor to Donald Trump’s presidential campaign. Strong America indeed!
Deng eventually decided to take his business public, and in 2016, he met a group of people who wanted to help him do it. Richard Xu, Amy He, and Jimmy Hao were the founders of E-Compass Acquisition Corp., a special purpose acquisition corporation. An SPAC is an entity that is set up for the sole purpose of executing a reverse merger with a private company in order to take it public. The process works like this: First, an SPAC will debut on a stock exchange through a traditional IPO that it uses to attract investment. Next, it begins searching for a suitable acquisition target. When it finds one, it approaches the target company’s management to negotiate a deal. Finally, if a deal is reached, the SPAC executes a reverse merger with the target company, which takes its place on the stock exchange having avoided the regulatory hassle of a traditional IPO.
If that sounds like a half-hearted rebrand of the Chinese reverse merger scandal, many of the people involved in that fraud agree - which is why now they’re all in the SPAC business. The use of these entities to circumvent the IPO process has exploded over the past several years.
“The China Hustle” spends a good deal of time on the role of the law firm Loeb & Loeb LLP in brokering the deals that brought fraudulent Chinese companies to American shores. The film even interviews Mitch Nussbaum, the vice chair of Loeb & Loeb and co-chair of its Capital Markets and Corporate Department. Nussbaum has since become a major figure in the SPAC boom, and filings with the SEC show that he’s worked with E-Compass founders Richard Xu, Amy He, and Jimmy Hao.
In 2014, he and a man named Giovanni Caruso, another lawyer at Loeb & Loeb specializing in China-based businesses, worked on a deal with earlier SPAC helmed by the trio. Together, they helped a Chinese lender called Wins Finance Holdings, Inc. make it on to the NASDAQ through a reverse merger. The story of Wins has been covered at some length in the financial press. After its stock inexplicably surged by over 4,500% in 2017, Wins began to attract scrutiny from some who believed it was significantly overvalued. Activist investors revealed that Jimmy Hao had been involved in other shady reverse mergers that went belly-up, and that the Chief Financial Officer at Wins had previously worked at a company that was delisted by NASDAQ for manipulating its stock value. In 2020, Wins was also tossed off the NASDAQ after its assets were frozen by Chinese authorities.
This history was either unknown or unconcerning to Long Deng. In February 2016, a mutual acquaintance introduced him to the team from E-Compass, kicking off several months of negotiations that ended with an agreement to take NYM public. An important condition of the deal was that NYM obtain a line of credit sufficient to execute its growth strategy, so NYM got approved for a $25 million credit facility from KeyBank National Association, a regional bank based in Cleveland, Ohio. Although Mitch Nussbaum wasn’t involved with this deal, he did work on E-Compass’ IPO in 2015. His associate from the Wins debacle, Giovanni Caruso, did work directly on the reverse merger with NYM. At the same time Caruso was serving as counsel to E-Compass for the deal, Loeb & Loeb was also providing legal advice to NYM with regard to its credit agreement with KeyBank.
In February 2017, New York Mart executed the reverse merger with E-Compass, rebranded as iFresh, and became a publicly traded company on the NASDAQ. Things only went downhill from there.
II. Rotting on the Vine
The credit agreement with KeyBank required iFresh to maintain a debt-to-earnings ratio of less than 3 to 1; failure to do so would constitute an event of default. That’s exactly what happened in March 2018, when the company’s debt-to-earnings ratio was greater than 3 to 1 on the last day of the fiscal quarter. Then in June 2018, the IRS imposed a tax lien on iFresh in the amount of $1.2 million after it failed to fully pay its taxes - another violation of the credit agreement. Why was iFresh struggling so mightily with its debt and tax obligations?
The company’s filings with the SEC make the answer obvious. In 2017, iFresh reported $130 million in sales and $1.5 million in positive net income. By 2019, sales were down to $125 million and net income losses exceeded $12 million. In 2020, sales plunged to $89m million with a further $8 million in net income losses. The iFresh fiscal year ends on March 31st, meaning the particularly dire 2020 figures were not the result of the COVID-19 pandemic, which only began to shutter businesses a few weeks prior.
KeyBank gave iFresh some time to turn things around after the initial events of default. But by early 2019, the company’s financial position had not improved, and KeyBank wanted its money back. In May of that year, the bank granted iFresh a forbearance agreement that required it to retain a chief restructuring officer and pursue all available avenues for raising money to repay the credit facility, up to and including sale of the company. Faced with the prospect of losing the business he’d built from nothing after immigrating to Queens more than two decades before, Long Deng decided that if KeyBank wanted a restructure, that’s exactly what he’d give them.
III. Forbidden Fruit
Under the credit agreement, iFresh had to get approval from KeyBank for any acquisitions it wanted to undertake. Accordingly, iFresh requested permission to acquire a China-based company called Xiaotai International Investment, Inc., which KeyBank granted in May 2019. Xiaotai was a financial services firm doing business exclusively in China. Privately owned by its founder Baofeng Pan, the company had been trying to obtain approval for an IPO on an American stock exchange for years. But according to reports in the Chinese press, declining revenues and accumulating debts had resulted in multiple rejections. Luckily for Pan, an alternative path to a public listing had just opened up in Long Island City.
In June 2019, iFresh shareholders voted to approve a restructuring plan that went like this: First, iFresh would sell a subsidiary entity vested with the entire grocery business to another company solely owned by Long Deng, Then, iFresh would execute the reverse merger with Xiaotai, change its name, and become “a financial services group operating in both smart financing as well as microfinance sectors in China.” In the end, the grocery business would be a private company again, and Xiaotai would be a publicly traded company on the NASDAQ. Responsibility for repayment of the credit facility from KeyBank would follow the grocery business to its new home in Long Deng’s other company. How exactly iFresh would have benefitted from this arrangement if it would still be saddled with its gargantuan debt burden is unclear.
At any rate, it never got to find out. In November 2019, iFresh told the SEC that it had learned Xiaotai was being investigated by Chinese authorities for alleged financial crimes, and that a number of its executives had been arrested. Days later, media reports confirmed that Xiaotai founder Baofang Pan was among those arrested. The firm collapsed after its assets were frozen, triggering hundreds of millions in losses for investors. Consequently, iFresh was forced to abandon the restructure.
In March 2020, iFresh received a subpoena from the SEC demanding records related to its “financial institution accounts, accounting practices, auditing practices, internal controls, payroll, and information furnished to auditors.” Its auditing firm, Friedman LLP - which had performed the audit of Xiaotai’s financials provided to iFresh shareholders and the SEC - was also subpoenaed. In its annual report for 2020, iFresh noted that although the company “isn’t currently the subject of any enforcement proceedings, the investigation could lead to enforcement proceedings if the SEC contends that the Company has not complied with securities laws.”
Seeking more information, I filed a request with the SEC under the Freedom of Information Act for copies of both subpoenas and any other documents in the SEC’s possession related to their inquiry into iFresh. On Monday, the agency rejected my request citing FOIA exemption 7(a), which permits them to deny access to materials compiled for law enforcement purposes if disclosing them could interfere with enforcement proceedings. Although federal agencies sometimes use this exemption to block access to records related to closed investigations, studies have shown that 7(a) denials are strongly associated with ongoing SEC enforcement actions.
Although it’s impossible to confirm definitively, in my opinion there is strong evidence to believe the investigation is related to the reverse merger attempt with Xiaotai.
IV. Artificial Flavor
In documents provided to shareholders, iFresh said that Xiaotai had been seeking a way to go public in the US for a number of years. In the summer of 2018, Xiaotai’s management discussed the difficulty they were having in doing so with a business associate of theirs: a man named Long Yi. The documents then say that in December 2018, two iFresh executives met with Yi to discuss the possibility of a reverse merger with Xiaotai. But the documents don’t say how those executives knew Yi, which side initiated the discussion of the reverse merger, or even how the meeting came about in the first place. At any rate, Yi communicated iFresh’s interest in a deal to Xiaotai’s management. Once Xiaotai reciprocated, Yi connected the two sides for negotiations.
In January 2019, iFresh appointed Yi as its new Chief Financial Officer on a part-time basis. At the time, Yi was also serving as CFO to another company previously known as China Commercial Credit, Inc., a microfinance firm with a troubled history. In 2015, it was named in a class action lawsuit brought by borrowers alleging that the company had engaged in predatory lending practices. Yi was named individually as a co-defendant. After settling the suit out of court, CCC Inc. decided that the microfinance game was more trouble than it was worth, and chose to move into another sector. In June 2018, the company sold off a subsidiary entity that housed its lending business to a company called HK Xu Ding Co. Limited. Long Yi’s signature appears on the sale agreement on behalf of CCC Inc.
This transaction is significant in light of what happened next. Recall that under the reverse merger plan, iFresh would first sell off the grocery business to another company owned by Long Deng. But iFresh couldn’t just sell it on the cheap; that would be a breach of its fiduciary duty to its shareholders. iFresh needed to ask for a plausible price, which it set at $9 million. To raise the money, Deng sold all his shares of iFresh - 51% of the company’s outstanding stock, and thus, a controlling interest - in February 2019, three weeks after Long Yi was appointed as iFresh CFO. The buyer was Xu Ding, the same company that bought the CCC Inc. subsidiary in a deal brokered by Yi just six months before.
Immediately after Deng sold a controlling interest in iFresh to Xu Ding, Xu Ding was purchased by another company called HK Suixin Co., Limited. HK Suixin is an entity controlled by Baofeng Pan, the founder of Xiaotai. In other words, at the same time that iFresh management was negotiating the restructure agreement with Xiaotai and asking iFresh shareholders to approve the deal, they had effectively already sold the company to Xiaotai. This fact was never mentioned in any of iFresh’s public disclosures or in any documents provided to shareholders. Nor was it ever mentioned that Long Yi had also recently served as the CFO at Xiaotai. The firm’s website went dark after it folded at the end of 2019, but an archived version reveals that Yi was still a top official at Xiaotai as recently as August 2018.
All this suggests that iFresh management’s relationship with Xiaotai stretches back further than it has previously disclosed. The omission of Yi’s work history at Xiaotai - and of Pan’s ownership stake in iFresh through another of his companies - from documents provided to shareholders seems deliberate, and a potential focus of the SEC’s investigation. No doubt they also want to know how much iFresh knew about the allegedly criminal nature of Xiaotai’s business activities. Even if they knew nothing, presumably Yi did, since he was Xiaotai’s top money man just before signing on at iFresh. At the very least, the reverse merger deal represents a significant failure of due diligence on the part of iFresh, and a potential breach of its fiduciary duty to its shareholders. And if its management did have more intimate knowledge of Xiaotai’s activities, they were helping a criminal enterprise gain access to the American stock market.
V. New Harvest
In January 2020, iFresh reported to the SEC that Long Yi had abruptly resigned as its CFO. In March, they hired a woman named Amy Xue as his replacement. Previously, Xue served as CFO to a company called XT Energy Group, Inc., a renewable energy firm operating in China but incorporated in Nevada. Just as it had the previous year, iFresh would spend the rest of 2020 intertwining its business with another enterprise connected to a new CFO.
Recall that a large share of iFresh stock was now controlled by HK Suixin, an entity owned by Xiaotai founder Baofeng Pan. In March 2020, HK Suixin sold the subsidiary that housed its iFresh stock to a woman named Ping Zhou. By this time, iFresh had issued a large amount of new stock, and so the shares now under Ping Zhou’s control represented only a 27% stake in the company. Ping Zhou is the daughter of a man named Dengrong Zhou, founder of XT Energy, the former employer of iFresh’s new CFO.
iFresh then conducted a series of transactions in which it issued a large amount of stock to investors connected to XT Energy. In March, Dengrong Zhou and an associate bought a significant stake in iFresh - which meant a direct infusion of badly needed cash - on the condition that iFresh acquire two wine companies that had a prior business relationship with XT Energy. iFresh complied, but it didn’t pay in cash - it paid with more shares of its stock. Consequently, the wine companies’ owners received a 10% stake in iFresh. In August, iFresh cut a similar deal to acquire a company called Jiuxiang Blue Sky Technology (Beijing) Co., whose owners received a large amount of iFresh stock as payment. Also in August, Ping Zhou joined the iFresh Board of Directors.
The speed and extent of these connections gives the impression that there was a deliberate effort being undertaken by iFresh and XT Energy toward some shared goal. What happened next does not.
In January 2021, HK Suixin told the SEC that the paperwork for the transaction that gave Ping Zhou control over its iFresh shares had not been signed by the proper officials within the company. As such, the sale was void. HK Suixin - and consequently its owner, Baofeng Pan - retained control of the shares. That same month, Baofeng Pan, Dengrong Zhou, and the former owners of the companies iFresh had acquired in exchange for its stock notified the SEC that together, they owned a majority stake in iFresh. Moreover, they had voted to remove Long Deng as CEO and expel him from the Board of Directors, along with another longtime iFresh board member named Mark Fang. In its most recent quarterly report, iFresh says that it has a “meritorious defense” against this apparent takeover attempt, and that a trial is set for this month.
VI. Fresh Questions
Of the many unresolved questions in this saga, here are the ones I think are the most relevant, and to which I’ve been unable to come up with satisfying answers:
What did iFresh stand to gain from helping Xiaotai go public if doing so wouldn’t get rid of the debt burden from KeyBank? Did Xiaotai offer financial assistance to iFresh if it participated in this scheme?
What is the relationship between Baofeng Pan and Dengrong Zhou? Why are they seemingly cooperating in a plan to take over iFresh, and why did iFresh initiate its relationship with Zhou? What did iFresh think it was doing as it was issuing so much of its stock to Zhou’s associates?
Why are all of these people fighting for control of a struggling mid-sized grocery chain with a crippling load of debt? Crippling at the time anyway. In April 2021, KeyBank granted iFresh a waiver agreement that allowed the company to exit default and get back on a more manageable payment plan. Both Ping Zhou and Dengrong Zhou are listed as consenting to the arrangement. What’s up with that?
And of course, the question that opened this article: why are iFresh’s top executives so interested in Andrew Yang being the mayor? Long Deng, his wife and sister, and Mark Fang have all maxed out to Yang’s campaign. More than 30 other employees of iFresh and its subsidiaries are also Yang donors.
I have no idea, to be honest with you. I contacted Yang’s campaign and asked for more information about his relationship with iFresh, and why he thought such a committed conservative like Long Deng was supporting his campaign, but they never got back to me. Part of me wonders if the person they really want to impress is Bradley Tusk. Like many investors these days, Tusk has decided he wants a piece of the SPAC boom. Last year, he announced the formation of his own SPAC, IG Acquisition, that would target high-value companies in the leisure and gaming sectors. Perhaps iFresh management hopes that if it’s supportive of Yang, he could put in a good word with his influential patron to throw them some kind of a bone. Then again, Yang is competing with Eric Adams to see who can run the most right-wing campaign, so perhaps his support is genuinely ideological in nature.
Sometimes a little idealism is in order, even for the most committed materialist.