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Class Action Lawsuits Filed Against China Medical Technologies Alleging Artificial Stock Inflation

NEW YORK (GenomeWeb News) – Investors are suing China Medical Technologies alleging the firm engaged in actions that artificially inflated its stock in violation of US securities law.

The Beijing-based in vitro diagnostics firm has been hit with at least three class action lawsuits in the past two months, including two filed in the past week, in which plaintiffs accuse the company of making false and/or misleading statements, and withholding material and adverse information.

China Med Tech Chairman and CEO Wu Xiaodong and CFO Takyung Tsang are also named as defendants in each of the three lawsuits, filed with the US District Court, Southern District of New York, which claim that for years the company made false statements about its finances.

Additionally, the plaintiffs allege the company carried out deals involving fraudulent shell companies that ultimately enriched its CEO at the expense of shareholders.

At the heart of the legal actions is China Med Tech's purchase of Beijing Bio-Ekon Biotechnology, completed in January 2008 for $28.8 million. In a press release at the time, China Med Tech said that the deal would strengthen its position in China's IVD market and "increase our [enhanced chemiluminescence immunoassay] products' penetration in hospitals across China."

Since then, the firm has touted its earnings growth, according to the lawsuits. For example, in February 2008 China Med Tech said that revenues rose 64 percent year over year during its fiscal-year 2007 third quarter. A year later, the company reported 51 percent growth year over year in revenues from continuing operations for FY 2008 Q3, and in November 2011 it said that revenues grew 24 percent year over year during its FY 2011 Q2.

Those results, according to the lawsuits, were false and misleading and omitted materially adverse information resulting in China Med Tech appearing to be financially healthier than it in actuality was.

Defendants also have cited a report published two months ago by private equity research firm Glaucus Research Group which said, "We believe that [China Med Tech] has defrauded investors."

Glaucus said that the seller of Beijing Bio-Ekon "was secretly related "to China Med Tech's CEO and that the firm "radically overpaid" for the company. Rather than the $28.8 million that it paid for Beijing Bio-Ekon, the company may have been worth between $5 million and $8 million.

"In our opinion, [China Med Tech's] Chairman orchestrated an acquisition to embezzle roughly $20 [million]-$30 million from the public company," Glaucus said.

The day after that report was published, China Med Tech's stock on the Nasdaq suffered a 24 percent drop to $2.57, with nearly 8.2 million shares of its stock exchanging hands, almost 10 times the volume from the day before. Though the shares bounced back to $3.30 on Dec. 12, the next day the firm announced it would restructure its debt to improve its balance sheet, resulting in a 13 percent drop to $2.87.

No shares of China Med Tech have traded since Feb. 6 when it closed at $1.82, down 4 percent.

Last month, both Fitch Ratings and Standard & Poor's Rating Services downgraded China Med Tech's credit rating after the company failed to make a semi-annual interest payment on its 6.25 percent $150 million convertible bond due in 2016. The payment was due on Dec. 15, 2011.

Because of the time difference, China Med Tech did not respond today to requests for comment from GenomeWeb Daily News.

Even before the Glaucus report, however, according to two of the lawsuits, questions were raised about the company by a website called GeoInvesting.com, which said that China Med Tech bought its ECLIA business from Wu, its CEO, in 2004 for $30.2 million, and its main building from Wu for $7.8 million. It also noted financial discrepancies in documents the company filed with the US Securities Exchange Commission and its equivalent in China, the State Administration for Industry and Commerce.

One lawsuit, filed on Feb. 3, also points to China Med Tech's acquisition of the FISH business from Supreme Well Investments and Molecular Diagnostics Technologies for $136.8 million in February 2007, and a $345 million deal in October 2008 to buy the HPV-DNA biosensor chip and surface plasmon resonance-based analysis platform from Supreme Well and Molecular Diagnostics.

In neither instance, the complaint alleges, did China Med Tech disclose that Zhong Chen, now its chief technology officer, had a relationship with Molecular Diagnostics' CytoTrend subsidiaries, which rendered statements made by China Med Tech about the technology being acquired and its market opportunity size to be "materially false and misleading."

One of the lawsuits is being brought forth on behalf of shareholders who purchased China Med Tech stock between Feb. 2, 2007 and Dec. 12, 2001, while the other two cover the period between Nov. 26, 2007 and Dec. 12, 2011.

The Feb. 3 lawsuit alleges that during those periods China Med Tech's false and misleading statements and omissions in their SEC documents artificially inflated the company's stock to a high of $57.50 on Feb. 28, 2008, and "directly caused losses to the plaintiff," Patrick Mahaney, as well as other shareholders.

Another lawsuit filed on Feb. 8 said, "These material misstatements and/or omissions had the cause and effect of creating in the market an unrealistically positive assessment of the company and its financial well-being and prospects."

Lawyers for all three lawsuits are asking the judges grant class-action status to the cases, and are seeking jury trials. The plaintiffs are seeking damages, as well as court, lawyer, and expert fees, and other relief.

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