MANHATTAN (CN) – A federal class action claims Beijing-based SinoTech Energy duped investors for $167 million during its initial public offering, though the company’s biggest customers and suppliers are just empty shells. It’s one of a series of cases in which Chinese sharpers are accused of profiting from unwary capitalists.
SinoTech claimed to be a “leading non-state owned provider of Enhanced Oil Recovery (‘EOR’) services to major oil and gas fields in China,” and sold 19.7 million American Depository Shares at $8.50 per share at its November 2010 IPO.
But 10 days ago, on Aug. 16, a research analyst writing under the name Alfred Little published a report “detailing numerous problems affecting CTE’s previously issued financial statements and future prospects,” the complaint states.
“The report found, among other things, that (1) the company’s sole import agent, who accounted for more than $100 million worth of oil drilling equipment orders, is an empty shell company with no sign of operations; (2) the company’s only chemical supplier is also an empty shell company, with little or no revenues; (3) the company’s largest subcontracting customer, which provides the vast majority of CTE’s revenues, has unverifiable operations with minimal revenues; (4) the financial statements CTE issued in the United States are inconsistent with similar filings the Company made in China; (5) the Company engaged in undisclosed related-party transactions in violation of Generally Accepted Accounting Principles (‘GAP’) ; and (6) positive statements the Company made regarding its internal financial controls were false and misleading when made.”
The company’s share price dropped by more than 40 percent after the report was published, from $4.02 on Aug. 15 to $2.35 the next day, on unusually high trading volume.
NASDAQ halted SinoTech trading that day, and announced that “trading would remain halted until the company ‘fully satisfied NASDAQ’S request for additional information.'” SinoTech trading is still at a standstill.
Lead plaintiff Jack Crayder is represented by Steven Toll and Kenneth Rehns, with Cohen Milstein Sellers & Toll.