MANHATTAN (CN) - Shares in a leading Chinese steel processor dropped 20 percent overnight after the company squandered $234 million on antique porcelain, a federal class action alleges.
China Gerui Advanced Materials Group, abbreviated in the complaint as CHOP, "is a leading niche niche and high value-added steel processing company," lead plaintiff Aram Pehlivanian says.
Though CHOP had made it a point earlier this year to "tout its significant cash reserves," shareholders are now beginning to learn the truth, according to the Nov. 26 complaint.
Pehlivanian says that CHOP had reported in March 2014 that it held $230.7 million in unrestricted cash.
On Sept. 4, however, "CHOP disclosed that, at some point between March 31, 2014, and June 30, 2014, it had purportedly spent $234 million of its unrestricted cash reserves to acquire a collection of antique Chinese porcelain that it valued at $905 million," the complaint states.
This announcement allegedly came with the disclosure "that as of June 30, 2014, it had a mere $3 million in unrestricted cash."
Pehlivanian says CHOP has remained silent on "when or from whom the porcelain was purchased, where the collection was being stored, whether it is insured, and who appraised and authenticated the collection."
"This supposed purchase of antiquities was all the more shocking because, in the years and months leading up to the announcement, CHOP had consistently and unambiguously communicated to the investing public that its goals for growth included an expansion and diversification of its product lines, identification of the overseas markets, and business combinations with competitors," the complaint states.
CHOP's Sept. 4 announcement caused its price to close that day at 49 cents a share shares, down 20 percent overnight, according to the complaint.
Noting that NASDAQ has a $1 per share listing requirement and that the exchange was primed to delist CHOP, Pehlivanian says CHOP's board of directors approved a one-for-10 reverse stock split on Nov. 6.
"However, the utter failure of CHOP's directors and officers to make any clarifying disclosures since Sept. 4, 2014, regarding CHOP's purported antiquities purchase has caused the investing public's total loss of confidence in CHOP's corporate governance, which has resulted in the price of CHOP's shares declining to a reverse split-adjusted low of $1.70 per share on Nov. 12, 2014, a mere fraction of the reverse split-adjusted Sept. 3, 2014, price of $6.10," the complaint states.
Pehlivanian enumerates several alleged misleading statements by CHOP, including that it purportedly had more than $200 million in unrestricted cash.
"Further, defendants failed to disclose: (1) that the company in fact planned to squander virtually its entire unrestricted cash holdings in order to - purportedly - purchase Chinese porcelain; and (2) that later, the company had largely disposed of its cash in order to - purportedly - purchase Chinese porcelain," the complaint continues.
Though CHOP is incorporated in the British Virgin Islands and has its main offices in Xinzheng City, Zhengzhou, China, the class says that jurisdiction arises from CHOP's Manhattan contacts.
CHOP allegedly uses the Manhattan office of the public-relations firm Grayling, for example, where it also has meetings, according to the complaint. Grayling is not a party to the action.
"Additionally, Harry Edelson, a member of CHOP's board, wrote in 2012 that CHOP's Hong Kong auditor transmits its financial audit to a 'highly capable' New York affiliate for further review," the complaint states. "Finally, CHOP CFP Edward Meng has served as a panelist at the American Metal Market's Steep Success Strategies Conferencce in Manhattan in 2012, 2013, and 2014, each of which was sponsored in part by CHOP."
Both Edelson and Meng are listed as defendants, alongside CHOP, five other directors and CEO Mingwang Lu.
CHOP allegedly said that its porcelain acquisition dates back more than 1,000 years to the Song Dynasty.
Claiming that the collection's previous owner gave it a major discount because of financial pressure, CHOP purported that it would "sell all 206 pieces over time to reinforce our cash position and earn a substantial return," the complaint states, citing CHOP's Sept. 4 announcement.
CHOP allegedly said at the time that "steel and iron ore prices have reached all-time lows over the past few years, [but that] prices of antique porcelain have risen sharply over the same time period."
Pehlivanian hopes to represent investors who bought CHOP stock between Jan. 11, 2012, and Sept. 4, 2014. He is represented by Curtis Trinko.
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