SEC Nails Chinese Chicken Company

WASHINGTON (CN) - The director of a Chinese chicken company swiped $12 million from a public offering on NASDAQ, the SEC claims in court.

The SEC accused Yuhe International and Gao Zhentao of securities fraud, in Federal Court.

"Between approximately December 2009 and June 2011, Yuhe misled its public investors by disseminating a series of materially false statements concerning a purported acquisition for more than $15 million," the lawsuit states. "In truth, the acquisition never occurred, and Gao used his power as CEO to divert more than $12 million that purportedly was used for the acquisition to a private account he controlled."

Yuhe claims to be China's largest supplier of day-old chickens. It sold $27 million of stock on the NASDAQ by claiming it was acquiring 13 more chicken farms, which would increase its capacity by 60 percent. But in June 2011, a research company revealed that the acquisition never happened.

"Yuhe fought back; Gao and others held a call with investors and issued two press releases denying the report's contents," the SEC says in the lawsuit. "The press releases reiterated that the Dajiang Acquisition had occurred, and the company provided purported evidence that the acquisition had taken place, including a purchase agreement and bank statements.

"The very next day, however, Yuhe publicly admitted the fraud in a conference call with investors. During the call, Yuhe disclosed for the first time that the Dajiang Acquisition had never been completed. Gao took 'full responsibility.' He also admitted that $12.1 million of the company's cash had been hidden in a separate account he personally controlled, but claimed 'it wouldn't impact the financials of the Company and hence no[t result in] volatility in the share price.'"

That turned out to be wrong, too, the SEC claims: "Following Yuhe's disclosure, Yuhe's independent auditor resigned and Yuhe's common shares plummeted from a closing price of $4.08 per share before the fraud was revealed, to $1.21 per share only two days later - a drop of more than 70 percent and a decline in market capitalization of approximately $58 million - before NASDAQ halted trading later that day. NASDAQ subsequently delisted Yuhe's common stock."

The SEC seeks disgorgement and penalties.

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