On the Enforcement Horizon: Fraud and Manipulation in Chinese ADRs
SEC and DOJ Enforcement in Chinese ADR Stocks Listed on NASDAQ
Introduction: Why U.S. Investors Are Exposed
Over the past decade, dozens of Chinese companies have gone public on U.S. exchanges through American Depositary Receipts (ADRs). An ADR generally allows U.S. investors to invest in a foreign company on a U.S stock exchange, like NASDAQ. When legitimate, ADRs provide U.S. investors access to the Chinese economy. But a recent indictment in EDVA highlights the risk of fraud.
In October 2025, the U.S. Attorney’s Office for the Eastern District of Virginia unsealed an indictment involving a pump-and-dump scheme of a Chinese ADR. The press release is here. The indictment charged individuals with a stock manipulation scheme that generated more than $100 million in illicit profits by artificially inflating the price and trading volume of the company’s NASDAQ-listed ADRs. The indictment is here. Given the Trump Administration’s focus on foreign actors targeting U.S. investors, expect similar cases to follow in the next six to eight months.
The SEC has also announced that it will be investigating U.S. actors who are involved in these schemes. Read here for more.
How Chinese ADRs Work
A Chinese ADR represents a U.S.-traded security that gives investors an indirect, contractual claim on the profits of a Chinese company through an offshore holding and a Variable Interest Entity (VIE) structure. Unlike most U.S. stocks, the investor holds no ownership interest in the underlying company. If this structure sounds somewhat complex, it is. We break down the steps below. But in a nutshell, an ADR allows U.S. investors to buy and sell shares of the Chinese company in U.S. dollars through regular brokerage accounts. In this way, U.S. investors can transact in the ADR without dealing with foreign currencies, Chinese stock exchanges or complex cross-border rules.
Putting aside the market structure, the underlying capitalistic principles of investing in an ADR are the same. A U.S. investor makes money on an ADR the same way they would with any stock: by selling it at a higher price than they paid or by receiving dividends that the foreign company pays out through the U.S. depositary bank. On the flip side, a U.S. investor can lose money on an ADR if the share price falls, the foreign company cuts or stops paying dividends or regulatory, political, or accounting issues cause the ADR’s value to drop sharply. Simply put, buy low and sell high.
The plumbing of an ADR of a Chinese company follows these four steps.
1. Formation of an Offshore Holding Company
The process starts when a Chinese company that wants to raise U.S. capital sets up an offshore holding company. Most ADRs are set up in the Cayman Islands or British Virgin Islands. This offshore entity becomes the legal issuer of the ADR that ultimately lists on the U.S stock exchange, like NASDAQ.
2. Contractual Control Through a VIE Structure
Because Chinese law restricts foreign ownership in key industries (like tech, telecommunications, and media), the offshore holding company cannot directly own the Chinese operating business. Instead, it enters into contracts with the mainland company through a VIE arrangement. These contracts transfer profits and control rights to the offshore entity without transferring legal ownership.
3. Depositary Bank Issues the ADRs
A U.S. depositary bank (like JPMorgan Chase, Citibank, or The Bank of New York Mellon) purchases shares of the offshore company and issues ADRs in the U.S. market.
Each ADR represents a specific number of shares of the offshore issuer, which itself is tied by contract to the Chinese business.
4. Trading on NASDAQ in U.S. Dollars
Investors buy and sell these ADRs on a U.S. stock exchange, just like domestic stocks.
Trades settle in U.S. dollars.
Dividends (if any) are paid in U.S. dollars.
The ADR is subject to U.S. securities laws and SEC reporting requirements (though the Chinese operating company itself may not be).
This complex structure is often poorly understood by retail investors and can obscure who actually owns the business and whether shareholders have enforceable rights under Chinese law. When the VIE relationship breaks down, the value of the ADR can collapse. Such collapses generally create significant exposure under securities laws for misrepresentation or omission of material facts about the company’s operation and profitability.
Market Manipulation Allegations in ADRs
Law enforcement has been increasingly focused on manipulative trading practices designed to inflate the prices of Chinese ADRs listed on NASDAQ. These schemes often involve coordinated trading, promotional campaigns, or artificial volume generation. Each tactic generally creates the appearance of market demand and is designed to artificially boost the price of the ADR. Collectively, these tactics can result in massive run ups in an ADRs price and can cause dramatic price drops when the music stops. Commonly alleged manipulative schemes involve:
Wash Trades and Matched Orders: Wash trading refers to the intentional buying and selling of the same financial instrument, in this case a stock, by the same party (or colluding parties) to create the false appearance of market activity or price movement. Under U.S. law, wash trading constitutes market manipulation and is prohibited by the Securities Exchange Act and Commodity Exchange Act because it misleads investors and regulators about genuine market demand. It can also constitute wire fraud because it sends false signals into the market about market action in a particular stock. To learn more about wash trading, check out this case.
Pump-and-Dump Campaigns: Paid promotions, social-media “stock tips,” or influencer campaigns drive hype and lure in retail investors. As noted below, many of the indicted Chinese ADR schemes involve encrypted messaging platforms and direct messages with potential investors. These types of messages were alleged in the above-referenced case in EDVA.
Layering and Spoofing: Spoofing is the practice of entering orders to buy or sell financial instruments with the intent to cancel them before execution, in order to deceive the market about supply, demand, or price and induce other market participants to trade. Under U.S. law it is a form of market manipulation—prohibited and enforceable under anti-spoofing provisions (including reforms added by the Dodd-Frank Act) and other securities and commodities laws because it fraudulently distorts price discovery and harms investors and markets. To learn more about spoofing, check out this case.
Cross-Border Promotional Networks: Offshore affiliates use encrypted apps such as WeChat or Telegram to promote ADRs to U.S. investors, evading SEC scrutiny.
Impersonation Allegations on WhatsApp, Telegram, and WeChat
Based on allegations in recent cases and market trends, a growing number of fraud cases with Chinese ADRs involve individuals impersonating financial advisors or licensed brokers on encrypted messaging platforms.
So-called advisors often create convincing profiles that mimic legitimate investment professionals. These so-called advisors can also sometimes clone or steal the identities of real advisors or analysts. These advisors then contact potential investors via WhatsApp, Telegram, or WeChat. Once connected with a critical mass of investors, the advisors hold themselves out as representatives of reputable firms or “research teams” promising early access to high-yield ADR opportunities. The alleged goal of these advisors is to convince as many investors as possible to invest in the at-issue ADR with the promise of sky-high returns, a safe investment or both.
Evidence Collected in ADR Fraud and Manipulation Investigations
When the SEC, FINRA, or Department of Justice (DOJ) investigates securities fraud involving Chinese ADRs, the scope of evidence collection is expansive. These investigations combine forensic trading data, digital communications, and accounting records to build a comprehensive case of market misconduct around false representations and false signals into the market. Evidence in these cases generally includes:
Trading and Market Data: order and execution records, clearing data, and algorithmic trading logs.
Corporate and Financial Records: audit work papers, VIE contracts, and cross-border fund transfers.
Communications Evidence: emails, WeChat/WhatsApp/Telegram logs, and marketing materials.
Expert Testimony: analysts, auditors, and forensic accountants often testify about market impact and intent.
Victim Testimony: testimony from individuals who invested and lost money in the ADR
The Importance of Trading Data in Defending Market Manipulation Claims
Trading data is the single most important category of evidence in both building and defending market manipulation cases. It provides an objective record of what happened in the market. Analyzing the trade data allows defense counsel to separate lawful trading activity from alleged manipulation.
1. Establishing Legitimate Trading Intent
Order and execution data may show that trades were driven by legitimate market dynamics, such as arbitrage, liquidity management, or hedging strategies, and disprove the government’s theory of manipulative intent.
2. Reconstructing the Order Book
Rebuilding the order book at key moments allows experts to analyze supply-demand conditions and spread behavior. This order-book analysis is critical for any charges related to either spoofing or wash trading. This analysis may prove that price changes stemmed from market events, not misconduct.
3. Challenging Government Causation Theories
Trading data helps the defense rebut claims that alleged activity caused artificial price movements or investor harm.
4. Supporting Expert Testimony
Defense experts use granular order data to illustrate execution patterns, timing, and correlation with market news.
Overall, defense strategies in a market manipulation case include demonstrating legitimate trading intent, challenging causation in the stock price movement, leveraging forensic experts, and presenting robust compliance evidence. Cross-border evidentiary gaps can also provide strategic leverage to contest intent and jurisdictional reach.
The Importance of Contemporaneous Electronic Communications in Building and Defending Manipulation and Fraud Cases
While trading data tells the what, contemporaneous electronic communications reveal the why. Electronic communications are central to both the prosecution and defense. Emails, Bloomberg chats, Slack messages, and encrypted app logs (like WeChat, WhatsApp, and Telegram) often form the evidentiary backbone of a market manipulation or securities fraud case.
1. Establishing Intent or Good Faith
For DOJ, real-time messages can show knowledge of misconduct or coordination among alleged co-conspirators. For defense counsel, the same communications can demonstrate good-faith decision-making, legitimate market discussions, or compliance-driven supervision.
2. Corroborating or Contradicting Trading Patterns
When aligned with order-book data, chat logs and emails can clarify whether a specific trade was either preplanned manipulation or an ordinary market reaction. Forensic teams often overlay timestamps from messages and trades to identify patterns or isolate the at-issue trades.
3. Reconstructing the Decision Timeline
Electronic communications create a contemporaneous narrative of the events. These messages are often used as snapshots into the head of the trader and evidence the intent behind the trades. Electronic messages can also provide broader context. They may show who approved trades, what information was available and known at the time, and what led to a specific trade. This timeline is particularly important in parallel SEC–DOJ investigations, where intent often determines whether a case will remain civil (SEC) or turn criminal (DOJ).
4. Authentication and Preservation Issues
Defense teams must move quickly to preserve chat histories, email archives, and cloud backups. Failure to maintain or authenticate these communications can limit their evidentiary value. In the worse case, failing to collect known evidence may lead to spoliation allegations from the SEC or obstruction allegations from DOJ. In cross-border matters, securing WeChat or other data often requires cooperation from foreign counsel and digital-forensic specialists.
5. Strategic Use at Trial
Contemporaneous communications can humanize defendants and, more importantly, show deliberation and transparency, rather than concealment. In this way, the messages can rebut the government’s narrative of deceit and reinforce the argument that trading activity reflected legitimate trading activity, not manipulation or fraud.
Challenges in Collecting Evidence from Abroad
While the types of evidence in a Chinese ADR fraud case is vast, obtaining certain types of evidence poses some difficulties for law enforcement and provides openings for the defense. These difficulties include:
Jurisdictional Barriers: Chinese state-secrets and data-security laws restrict document transfers abroad.
Limited MLAT Cooperation: Mutual Legal Assistance Treaty requests to other jurisdictions can take months—even years—and yield incomplete or untimely results.
Offshore Intermediaries: Cayman or Hong Kong entities complicate tracing of beneficial ownership.
Encrypted and Foreign-Language Data: WeChat or other communications require forensic extraction and translation.
Reliance on Whistleblowers or Insiders: Regulators often depend on insider cooperation to fill evidentiary gaps.
Parallel Investigations Between the SEC and DOJ
Complex ADR matters frequently trigger parallel investigations, which involve civil inquiries by the SEC alongside criminal investigations by the DOJ. These parallel investigations often begin when the SEC refers evidence of willful misconduct to prosecutors at DOJ. DOJ in turn may issue its own subpoenas, conduct interviews, and execute search warrants for electronic communications.
Parallel proceedings pose substantial risks to any individual. Most notably, testimony of an individual to the SEC can be used in criminal prosecutions. Effective defense requires close coordination between SEC and DOJ counsel to ensure consistent strategy and guard against any criminal exposure.
Common Criminal Offenses in Chinese ADR and Market Manipulation Cases
The DOJ and SEC frequently rely on a combination of securities fraud, wire fraud, and market manipulation statutes to prosecute ADR-related conduct. Understanding these offenses is essential for assessing exposure and shaping an effective defense.
1. Securities Fraud – 15 U.S.C. §§ 78j(b) and 78ff; SEC Rule 10b-5
Securities fraud under Title 15 is the cornerstone of most prosecutions in this area. These statutes criminalize schemes to defraud investors through material misrepresentations, omissions, or deceptive trading practices. Violations carry penalties of up to 20 years in prison and substantial fines.
2. Market Manipulation – 15 U.S.C. § 78i(a)
This statute criminalizes classic manipulation tactics such as wash trades, spoofing, and other schemes designed to create artificial prices or volume.
3. Wire Fraud – 18 U.S.C. § 1343 — and Securities Fraud - 18 U.S.C. § 1348
These two statutes are close cousins for purposes of statutory interpretation and cover a range of conduct. Both statutes generally criminalize schemes to defraud and material misrepresentations to investors.
4. Conspiracy – 18 U.S.C. § 371 or 18 U.S.C. § 1349
These statutes allow prosecutors to charge coordinated conduct among alleged co-conspirators. Conspiracy charges are often used to bring multiple traders, promoters, and offshore actors into a single case. The difference between the two statutes lies in the potential punishment upon conviction.
Conclusion: Heightened Law Enforcement Risk but Defense Openings
Defending cases involving Chinese ADRs and alleged market manipulation requires a disciplined, evidence-driven approach that incorporates trading data, electronic communications, and cross-border legal strategy. Any successful defense turns on demonstrating legitimate trading intent, exposing alternative market causes for price movements, and leveraging the complexity of offshore structures to challenge jurisdiction and wrongful intent. Where U.S. enforcement agencies are aggressively pursuing foreign issuers and executives, an informed, data-focused defense protect clients and may limit exposure to criminal charges.
Questions? Contact Scott Armstrong, an experienced securities fraud defense attorney. Scott is a defense attorney for traders, executives and marketers in cases involving securities fraud and manipulation. To defend individuals in these cases, Scott relies on his litigation experience in Miami, Chicago, Houston, Denver, DC, Alexandria, Newark, Nashville, Knoxville, Detroit, Columbus, Los Angeles, and New York.
