(Reuters) — U.S. prosecutors on Tuesday tangled with defense attorneys over how the Justice Department is pursuing a fraud case against a former executive of a Chinese reverse merger company, one of the first such criminal cases being pursued.

Federal prosecutors have accused Chao Jiang, a former vice president of China North East Petroleum Holdings Ltd., of misappropriating corporate funds and lying to the U.S. Securities and Exchange Commission about those funds.

On Tuesday, prosecutors sparred with Mr. Jiang's lawyers over what evidence they might be able to present at trial, and whether U.S. authorities had conducted an appropriate investigation.

The case is headed to trial next month, part of an effort by U.S. officials to crack down on suspected fraud at U.S.-listed Chinese companies.

The effort has been complicated in recent years by a lack of access to foreign evidence.

The SEC has pursued dozens of cases against Chinese companies that entered the U.S. capital markets through backdoor mergers with U.S. shell companies and has delisted many for failing to file accurate or timely reports. But it has run into problems obtaining audit documents from China to pursue the investigations further and build evidence of fraud.

China audit firms have resisted turning over that information, citing Chinese secrecy laws.

In 2011, a top SEC official said the Justice Department was similarly investigating accounting irregularities at Chinese companies listed in the United States, but few criminal charges have been filed since then.

The SEC has taken steps to force audit firms to assist in its investigations, and an SEC administrative law judge last month ordered suspension of the Chinese units of the "Big Four" accounting firms over their failure to turn over the work papers.

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The United States has also undertaken efforts to negotiate a diplomatic solution with Chinese authorities, and the head of the Public Company Accounting Oversight Board, which regulates auditors, is expected to comment on the issue on Wednesday after an SEC meeting about the PCAOB's budget.

In the criminal case against Mr. Jiang, prosecutors and Jiang's lawyers argued at the Tuesday hearing about whether they might be able to present certain foreign evidence at trial, including a deposition taken by the SEC of the company's auditor in Hong Kong.

Last May, a grand jury indicted Mr. Jiang, a U.S. resident, in a case that involves wire transfers from an American bank account and statements made to SEC investigators in Washington. The indictment does not describe evidence obtained from overseas.

Mr. Jiang's lawyers have argued in court papers that the government used irrelevant information in obtaining the indictment, and did not present facts needed to back up a securities fraud charge.

The oil exploration company, formed in 2004 through a reverse merger with a U.S. shell company, was delisted from the New York Stock Exchange in 2012.

In 2009, the company told investors they planned to use funds from a stock offering for general corporate purposes and to repay prior corporate debt.

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Instead, prosecutors said Mr. Jiang and the company's chief executive misappropriated $1.2 million of the proceeds by wiring the money to family members who used the money to buy a home, jewelry and a car.

Prosecutors also accused Mr. Jiang of testifying under oath that no family members had received anything valued at more than $500 from the company, even though some $965,000 had been wired to his father.

But Mr. Jiang's lawyers argued in court documents that the government had failed to provide any evidence that the money was transferred for fraudulent purposes.

"For example, the payment of an employee's salary does not suddenly become fraudulent based upon how the employee chooses to spend his or her salary," his lawyers wrote.

"Mr. Jiang looks forward to his day in court," his attorney, Michael Li-Ming Wong of Gibson, Dunn & Crutcher L.L.P., said.

A Justice Department spokesman declined comment.