Friday, October 23, 2015

In Re ChinaCast Educ. Corp. Sec. Lit. (9th Cir. - Oct. 23, 2015)

China's a great place to invest.  Who could possibly lose money in such a market?

Well . . . .

"ChinaCast, founded in 1999, is a forprofit postsecondary education and e-learning services provider that sells distance learning and “multimedia education content” over the Internet and from three campuses in China. . . . ChinaCast boasted a market capitalization topping $200 million and was listed on the NASDAQ Global Select Market. ChinaCast’s stock offerings in the United States in 2008 and 2009 generated $48 million in net proceeds. . . .

[T]he complaint alleges, ChinaCast’s founder and CEO, Ron Chan Tze Ngon (“Chan”), looted the company’s coffers, including proceeds from the U.S. stock offerings. From June 2011 through April 2012, Chan “transferred” $120 million of corporate assets to outside accounts that were controlled by him and his allies. In addition, Chan permitted a company vice president to move $5.6 million in company funds to his son; “unlawfully transferred control” of two of ChinaCast’s private colleges outside the company; and pledged $37 million in company assets to secure third-party loans unrelated to ChinaCast’s business. These actions brought ChinaCast to financial ruin. The company cannot even afford its legal bills, according to its lawyers, who submitted a bare-bones brief on appeal and stated that “ChinaCast now unfortunately lacks the funds necessary to mount with full vigor the defense of this appeal.”

In the midst of this fraud on multiple fronts, Chan and ChinaCast Chief Financial Officer Antonio Sena participated in a series of earnings calls and other communication with investors. During these calls, neither official disclosed the fraudulent activities taking place; instead, Chan emphasized the company’s financial health and stability. For example, in a press release and conference call in fall 2011, Chan reassured investors that “no questions or concern[s] have ever been raised by the company’s auditors or audit committee about our cash balances.” Throughout 2011, Chan signed SEC filings on behalf of ChinaCast and never disclosed the $120 million in transfers and other fraudulent activities afoot."

Not good.