The Securities and Exchange Commission (SEC) has filed a lawsuit against the chairman and the former Chief Executive Officer of Puda Coal Inc alleging them of defrauding investors by selling stakes in the firm which they had turned into an empty shell company.

Zhao Ming, the chairman of Puda Coal, and Zhu Liping, the former chief executive, are accused of failing to disclose a 2009 transaction that transferred the company's only revenue-producing asset, Shanxi Puda Coal, to the chairman.

Zhao, 39, a Chinese national, took over Puda's 90 percent stake in Chinese coal mining company Shanxi Puda Coal Group Co. Ltd. in September 2009, just weeks before Taiyuan (China-based Puda) had announced that Shanxi had received a highly lucrative government deal.

In July 2010, Zhao transferred 49 percent of the coal business to a fund controlled by Citic Group. Zhao pledged the other 51 percent as collateral in exchange for a loan from Citic. The SEC said that the deal allowed the chairman to reap a huge profit.

At the same time that Citic Trust was effectively selling interests in Shanxi Coal to Chinese investors, the defendants were still telling U.S. investors that Puda owned a 90 percent stake in the company, said George Canellos, New York regional director of SEC in the lawsuit.

Zhu, 55, also a Chinese national, knew of the scheme and forged a letter falsely saying Citic claimed no interest in the coal business.

Puda Coal's common stock was listed and traded on the New York Stock Exchange from September 2009 to August 2011. The company shares dropped to pennies from a high of almost $17 a share.

This case is part of the growing concern about Chinese companies, which are coming to the U.S through reverse merger.

Suspicions of accounting fraud and the filing of false and misleading statements are mounting on these reverse mergers. The SEC has said that it is working with regulators in China to make certain that investors are protected.