Chinese Reverse Merger Called a Fraud

WASHINGTON (CN) – CEO Zheng Cheng pumped up China Media Express Holdings’ stock price by “massively overstat(ing) its cash balances” – by as much as 40,000 percent – in SEC filings and press releases to investors, the SEC claims in court.
     China Media “purports to operate a television advertising network on inter-city and airport express buses in the People’s Republic of China,” the SEC says in its federal complaint against Zheng and his company.
     “Beginning in at least November 2009 and continuing thereafter, China Media – led by Cheng – materially overstated its cash balances in press releases and public filings with the Commission by a range of approximately 452 percent to over 40,000 percent. For example, on March 31, 2010, China Media filed its 2009 Form 10-K and reported $57 million in cash on hand for the fiscal year ended December 31, 2009 when it actually had a cash balance of only $141,000 [a 40,425 percent exaggeration]. On
     -November 9, 2010, the Company issued a press release announcing a cash balance of $170 million for the period ended September 30, 2010 when it actually had a cash balance of merely $10 million [a mere 1,700 percent exaggeration].”
     “In addition to massively overstating its cash balances, China Media also materially misrepresented (in public filings and press releases) the nature of its business relationships with two multi-national corporations, claiming they were its advertising clients when, in fact, they were not.
     “As China Media made materially false representations about its business operations and financial condition, including its cash balances, the Company’s stock price spiked. On October 15, 2009, the date China Media became a publicly traded company, its stock closed at $7.59 per share. Slightly more than one year later – when China Media, on November 9, 2010, falsely reported a cash balance of $170 million – the stock closed at $20.18 per share.
     “China Media’s falsely reported increases in its cash balances allowed the Company to attract investors and raise money from stock sales. Between January 2010 and December 2010, a hedge fund paid China Media $53 million to purchase millions of shares of China Media’s preferred and common stock.
     “Cheng had personal financial incentives that were tied to China Media’s performance, as he had agreements to receive China Media stock if the Company met certain net income targets. For example, when China Media falsely met these net income targets for fiscal year 2009, Cheng personally received 600,000 China Media shares which, at the time of receipt, were worth approximately $6 million.
     “The Commission brings this action seeking permanent injunctive relief to prevent future violations of the federal securities laws, civil penalties, disgorgement, an officer and director bar, and any other appropriate relief.”
     China Media is a Delaware corporation based in Fuzhou, China.
     Like many Chinese companies accused of securities frauds, it went public in the United State through a reverse merger: buying an empty corporate shell and repurposing it for whatever China Media claims to do. Reverse mergers allow companies to duck many SEC registration requirements.
     Zheng Cheng has been CEO and chairman of China Media since it was formed in October 2009 and held the same titles in its predecessor, Hong Kong Mandefu, the SEC says. It seeks disgorgement of ill-gotten gains, including Zheng’s salary and stock, restitution, penalties and an injunction.

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