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HF Foods Group Resolves Books And Records And Internal Controls Matter

HF

The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.

Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.

Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.

However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.

The latest example concerns HF Foods Group Inc., a Nevada-based food service distributor to Asian restaurants in the United States.

In summary fashion, this SEC administrative order finds:

“These proceedings concern violations of the antifraud and other provisions of the federal securities laws by Respondent HF Foods, a Nevada-based food service distributor to Asian restaurants in the United States, resulting from materially false and misleading disclosures and other fraudulent conduct implemented by its former Chairman and CEO Zhou Min Ni and former CFO Jian Ming “Jonathan” Ni.

From August 2018 through 2020, Zhou Min Ni, with the assistance of Jonathan Ni, misappropriated approximately $3.4 million from HF Foods, through related party transactions and otherwise, for the benefit of himself and his family, including to purchase and maintain a stable of luxury vehicles for the personal use of Zhou Min Ni and his family. Additionally, in anticipation of a 2018 reverse merger between a predecessor entity to HF Foods and a special purpose acquisition company (“SPAC”), Zhou Min Ni and Jonathan Ni schemed to remove $7.4 million of liabilities from the predecessor company’s books by creating a fictitious line of credit in the name of a purported supplier to conceal future repayments on the liabilities. After the reverse merger, pursuant to which HF Foods became a public company, HF Foods converted the line of credit into promissory notes to continue concealing the fraudulent conduct.

As a result of the above misconduct, from 2018 to 2020, HF Foods’s public filings contained both materially inaccurate financial statements and other false and misleading statements, including materially false statements regarding related party transactions and executive compensation. Zhou Min Ni, as Chairman and CEO of HF Foods, and Jonathan Ni, as CFO of HF Foods, reviewed and signed filings by HF Foods containing materially false and misleading statements.

In 2023, after an internal investigation conducted by a Special Investigation Committee of the Board of Directors (“SIC”), HF Foods announced a restatement of financial statements for fiscal years 2019 and 2020. The company further announced that it had determined, based on factual findings made by the SIC, among other things: certain advances to related parties, including payments for luxury cars, did not occur in the normal course of business, and certain payments should have been counted as compensation for the CEO; the purported supplier to which HF Foods extended a line of credit was not a supplier to HF Foods and there is no evidence that funds from the line of credit were provided to the purported supplier (contrary to what had been represented to the public); and payments to another related party were not commensurate with the services provided.”

Based on the above, the SEC found that HF Foods violated, among other things, the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, HF Foods consented to a cease-and-desist order and agreed to pay a $3.9 million civil penalty. (See here for the SEC release).

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