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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, September 4, 2012

SEC Charges Chinese Issuer with Phony Sales Revenues

The SEC charged China Sky One Medical Inc. (CSKI), a China-based company, and its chief executive with fraud for recording fake sales of a weight loss product to inflate revenues in the company’s financial statements by millions of dollars.  The SEC alleges that  CSKI falsely stated in 2007 annual and quarterly reports that it had entered into a strategic distribution agreement with a Malaysian company that would become the “exclusive” distributor of CSKI’s “slim patch” in Malaysia and generate $1 million per month in sales.  However, the company never actually entered into any such agreement.  CSKI instead created approximately $19.8 million in phony export sales to Malaysia that were recorded as revenue in its financial results for 2007 and 2008.  CEO Yan-qing Liu certified the overstated financial results, which appear in CSKI’s financial statements through 2010 and continue to impact the company’s retained earnings on its balance sheet. 

According to the SEC’s complaint, CSKI is based Harbin, China.  In addition to weight loss patches, the company produces and sells sprays, ointments, and other Chinese traditional pain relief and health and beauty products.  CSKI became a public company trading on the U.S. markets through a reverse merger in May 2006.

The SEC’s complaint seeks financial penalties against CSKI and Liu as well as disgorgement of ill-gotten gains by Liu, who personally benefited from the overstated financial statements through the company’s 2008 private placement of securities.  The SEC also seeks to have Liu reimburse CSKI for certain incentive-based compensation he received during the period affected by the fraud pursuant to Section 304 of the Sarbanes-Oxley Act, and to have Liu barred from acting as an officer or director of a public company.  The SEC also seeks to have CSKI and Liu permanently enjoined from future violations of these provisions of the federal securities laws

In addition to the court action, the SEC instituted administrative proceedings to determine whether to revoke or suspend registration of CSKI’s securities due to the company’s failure to file its annual report for 2011 or any quarterly reports for 2012.

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