Rino International Corp has agreed to settle a lawsuit in which US securities regulators say husband-and-wife executives of the Chinese maker of water-treatment equipment overstated the company's revenue and diverted $3.5 million in stock-offering proceeds to buy a California home, cars and designer clothing.

In announcing the settlement on Wednesday, the US Securities and Exchange Commission said Rino CEO Zou Dejun and his wife, Qiu Jianping, who was chairman of the company's board, had disgorged $3.5 million into a related class-action settlement with company investors. Zou and Qiu also agreed to pay fines of $150,000 and $100,000, respectively, and to be barred from serving as officers or directors of a public company for 10 years, the SEC said.

On the day in December 2009 that Rino completed a public offering that raised almost $100 million, Zou and Qiu used $3.5 million in company funds to buy a home in Orange County, California, according to a civil complaint the SEC filed on Wednesday.

In July 2010, the couple used a company credit card to purchase clothes from Chanel and Valentino boutiques in Beverly Hills, California, the SEC alleged. Rino spent about $95,000 on two Mercedes-Benz cars that were used by Zou, Qiu and other US-based employees of the company, according to the complaint.

That spending wasn't recorded as personal expenses or disclosed in Rino's required filings with the SEC, it said. According to the agency, Rino, which is also incorporated in Nevada, kept two sets of financial records - one for China and one for the US. The latter allegedly contained phony sales orders and records showing revenue of over 15 times the amounts in the Chinese books.

"When making their investment decisions, RINO's investors did not have the benefit of knowing that Zou and Qiu were diverting money and [that] the company's revenues were greatly exaggerated," Antonia Chion, associate director of the SEC's Enforcement Division, said in a statement.

As is customary in settlements of civil charges brought by the SEC, Rino and the two executives neither admitted nor denied the regulatory agency's allegations. The settlement is subject to approval by a federal judge.

In its civil complaint, the SEC detailed the scheme allegedly used by Zou and Qiu to overstate revenue at Rino, which is based in the northeastern Chinese port of Dalian, Liaoning province.

The agency noted that Hong Kong-based investment firm Muddy Waters LLC, which has been a short-seller of numerous Chinese companies' US-listed stock, issued a report in November 2010 saying Rino had falsely inflated its revenue and that many of its customer relationships didn't exist. Muddy Waters' research note also said cash was "draining" from the company and diverted for personal use.

In April 2011, the SEC suspended trading in Rino shares on Nasdaq, where they had been listed since the Chinese company's 2007 reverse merger with a shell company registered in the British Virgin Islands. The regulator cited Rino's failure to disclose to shareholders that investigators looking into fraud allegations at the company had resigned.

In a reverse merger, a private foreign company obtains a US stock listing from an existing publicly traded shell company. Many US-listed Chinese companies have preferred a reverse merger to a more-rigorous IPO, but the practice has declined in recent years amid increased scrutiny by the SEC and other US regulators of Chinese firms' accounting practices.

Rino shares, which now trade on the lightly regulated, privately run over-the-counter market in the US, closed at 5 cents on Wednesday. They had been as high as $20.74 in April 2010, a year before plunging 92 percent to $1.71 on the day Nasdaq trading was halted.

josephboris@chinadailyusa.com