MANHATTAN (CN) – “Going dark” for years on public filings, China Mining was headed by a CEO who misappropriated millions to pay off Las Vegas gambling debts, a $1 billion lawsuit claims.
Euro Pacific Capital sued U.S. China Mining Group Inc. and its president Hongwen Li in Manhattan Federal Court on behalf of dozens of shareholders.
Though based in Nevada, China Mining lives up to its name by exploring, developing and mining for coal in the People’s Republic to be sold by the metric ton for cash on delivery.
Shareholders entered into a securities purchase agreement (SPA) on Jan. 7, 2011.
Under the agreement, Euro Pacific became the “investor representative” for shareholders buying an aggregate of 3,750,000 units of the company for $4.00 per unit for a total of $15 million, according to the 33-page lawsuit.
The shareholders accuse Li of steering $2.8 million toward his personal debts.
“A significant portion of these funds were diverted by Mr. Li for purposes of paying down various personal financial obligations, including gambling debts he accumulated through Las Vegas gaming activities,” the complaint states.
China Mining filed its registration statement with the Securities and Exchange Commission on Feb. 14, 2011.
Between May 15, 2012 and Aug. 15, 2014, the company filed eight notifications telling the SEC it could not files its annual and quarterly reports on time, the lawsuit says.
“Most notably, China Mining’s last document filed with the SEC was a 128-25 notification of its inability to timely file its 10-Q for the quarter ending June 30, 2014,” the June 5 complaint states.
For that report, China Mining missed the grace period for a quarter that expired on Aug. 30, 2014, shareholders say.
“The last 10-K or 10-Q China Mining filed was its 10-Q for the period ending March 31, 2014, which it filed on May 20, 2014,” the complaint states. “Since then, China Mining has refused to provide any reports either publically, to Euro Pacific, or to the shareholders.”
Shareholders allege that the missed filings kept them – and other market participants – from learning the fair value of their equity holdings.
“As a result of China Mining ‘going dark,’ the shareholders are deprived of a market to sell their investment, as any decision to buy, sell, or hold by all market participants is rendered impossible,” the complaint states.
Shareholders also accuse Li of transferring millions to a “sham company.”
“Shortly after Mr. Li’s misappropriation of this $2,800,000, China Mining took out a bank loan in the amount of $3,000,000 for purposes of providing those funds to a sham company located in the United States called Majestic Machinery, Inc. (‘Majestic’), incorporated in the State of California on February 2, 2007,” the complaint states. “Majestic does not to have any credible nexus to coal mining or brokering activities.”
China Mining did not disclose this transaction on 10-Ks and 10-Qs, the lawsuit says.
Euro Pacific Capital alleges 10 counts of breach of contract, fraudulent inducement, securities violations, fraud, derivative and other allegations.
The investment company and the shareholders are represented by David Graff of Anderson Kill, P.C.
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