Class Claims ‘China Education’ Juggled Books

(CN) - Another for-profit school has been accused of exaggerating its profits to dupe investors into buying its stock at inflated prices. China Education Alliance, which claims to teach English online and in China, faces a shareholder class action in Los Angeles Federal Court.

Named plaintiff Vinnie Apicella claims the China Education Alliance and its officers and directors grossly misrepresented the company's financial performance.

The defendants told investors that company revenue climbed from $8.3 million in 2006 to $36.9 million in 2009, while it told the SEC that its net income increased from $2.63 million in 2006 to $15.2 million in 2009, according to the complaint.

For the first nine months of 2010 China Education Alliance, reported revenue of $33.8 million with a net income of $13 million.

But Apicella says all those filings were false and misleading.

"Financial statements which CEU filed in its annual reports with China's State Administration of Industry and Commerce for its main operating subsidiary, Harbin Zhong He Li Da Education technology Inc., reported revenue of merely $612,800 for fiscal 2008, $23,500 for fiscal 2007, and $54,500 for fiscal 2008," according to the complaint.

He claims that Kerrisdale Capital, a market research firm, issued a report on Nov. 29 this year accusing the company of financial fraud.

The report cited a number of red flags: that the alliance's websites did not work and were full of broken links and html errors, that the sites received only a fraction of the visitor traffic generated by comparable sites, and that after hiring an investigator to visit its training center in Harbin, China, Kerrisdale found it barren of desks and teaching equipment, according to the complaint.

By this time, the misrepresentations had inflated the price of the alliance's securities to $7 a share, Apicella says.

"As truth of the company's materially false and misleading statements entered the market, the price of the company's stock plummeted, falling to less than $3 per share," the complaint states.

The company has denied the allegations in the Kerrisdale report. But Apicella seeks class damages from the company and its officers Xiqun Yu, Susan Liu and Zibing Pan. He is represented by Laurence Rosen of Los Angeles.

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