(Originally published Dec. 13, 2011, in CBK’s email newsletter, “Week Review. Sign up on CBK’s home page.)
The U.S. District Court for the Central District of California dismissed a shareholder class action claiming that Beijing-based China Century Dragon (OTN: CCDM) reported falsely inflated revenues to the SEC. According to a press release issued by the firm’s counsel, Loeb & Loeb, shareholders cited discrepancies between the company’s SEC filings and revenue reported to the Chinese State Administration for Industry and Commerce (SAIC), as well as the resignation of CCDM’s auditors, as evidence of accounting fraud intended to mislead U.S. investors. According to the release, the U.S. District Judge dismissed the action concluding that the plaintiffs neglected to establish the accuracy or falsehood of either set of revenue figures in order to demonstrate that CCDM committed fraud.
At first glance this decision seems somewhat counter-intuitive. After all, the SEC halted, and later delisted, China Century Dragon SEC only six weeks after it started trading because of accounting discrepancies highlighted in the March 22, 2011, resignation letter of China Century Dragon’s independent auditor, MaloneBailey LLP.
MaloneBailey stated in its letter of resignation that accounting records may have been falsified and that it could not verify the company’s bank records. However, Michael MacPhail, a Partner in the White Collar and Securities Litigation Practice Group at Holme Roberts & Owen LLP (HRO), had a different take on the series of events, one which suggests MaloneBailey may have been trying to save face by distancing itself from several of its China-based clients. He discusses this in his July 1, 2011, blog post titled “PCAOB Criticizes Audit Firm That Later Fires Its Chinese Public Company Clients.” http://securitiesdefenseblog.hro.com/2011/07/pcaob-criticizes-audit-firm-that-later-fires-its-chinese-public-company-clients.html.
In his post, MacPhail outlines that MaloneBailey’s resignation as China Century Dragon’s independent auditor came on the heels of the accounting firm receiving a negative inspection report on February 24, 2001, from the PCAOB in regard to its work with its Chinese partner firm. In the same time period MaloneBailey also resigned as the auditor for NIVS Intellimedia Technology Group and China Intelligent Lighting and Electronics, which MacPhail interpreted as a reaction to the PCAOB’s negative report. MacPhail points out in the post that MaloneBailey’s allegations of fraud led to a domino effect, keeping the companies, guilty or not, from being able to file timely financial reports, opening the door for endless investors’ lawsuits, both of which immediately translate into a stack of legal bills.
It is not clear if China Century Dragon is still in business. The company did not release its own announcement about the judgment. Attempts to reach out directly to management, or through Loeb & Loeb, failed.
Timeline:
- Stock debuts on NYSE Amex via reverse merger under ticker “CDM”: Feb. 8, 2011
- Malone Bailey resigns as auditor: March 22, 2011
- Stock Halted: March 23, 2011
- Delisted: October 17, 2011
- Management: Mr. Fu Hai Ming, CEO; Mr. Duan (George) Dapeng, CFO
Further reading:
- SEC’s Notice of Administrative Proceeding: http://www.sec.gov/litigation/admin/2011/33-9224.pdf
- SEC notice of delisting: http://www.sec.gov/Archives/edgar/data/1143313/000114331311000119/xslF25X02/primary_doc.xml
