(CN) - Shareholders sued top executives at ChinaCast Education Corporation for allegedly unlawfully transferring approximately $120 million in company assets to unknown destinations.
     ChinaCast is a for-profit, post-secondary education and e-learning services provider founded in 1999. Listed on the NASDAQ since 2007, it's board of directors announced in March the removal of Ron Chan Tze Ngon from his role as the company's Chairman and CEO. He is named as a defendant alongside Chief Financial Officer Antonio Sena in a suit filed by shareholder Alejandro Puente.
     "[D]ue to the company's lack of internal controls over its operating subsidiaries during the class period - which were undisclosed - the company's interests in its two private colleges, Lijian College and Hubei Industrial University Business College, were transferred to persons outside of the company's group structure," the complaint states.
     The undisclosed transfers, according to the complaint, resulted in "materially false and misleading" shareholder letters and fiscal year-end reports to the Securities and Exchange Commission for 2010 and 2011. Specifically, Chan and Sena signed certifications required by the Sarbana-Oxley Act of 2002 that were sent along with the company's Q3 2011 10-Q, "attesting that they each disclosed 'Any fraud, whether or not material, that involves management' to the company's audit committee."
     The complaint also states that the company's third quarter press release "falsely set forth the company's cash and bank balances," and that its shareholder letter, signed by Chan, touted the third quarter results and reiterated "guidance for the year ended 2011."
     The allegedly illegal transfers emerged when the company issued a letter dated October 3, 2011 that informed shareholders it planned to suspend its $50 million buy-back program and that it intended to hire an independent firm to audit its cash balance. The announcement preceded a 29 percent decrease in stock prices and one day later, the company issued a press release intended to reassure investors and blamed delays in its buy-back program on legitimate worries over cash balances, leading the stock to rebound by 21 percent.
     On April 2, 2012, however, NASDAQ halted ChinaCast trading, "effectively rendering CAST's shares illiquid and worthless, damaging investors," the complaint said.
     On that same day, a press release revealed that Chan, "had been found refusing auditors' access to financial information, and unlawfully resisted his terminations by refusing to return key company property, including corporate chops necessary to run the business in China," the suit states. "Additionally, the company also admitted that it had uncovered questionable activities and transactions which raise the specter of possible illegal conduct by Chan and his accomplices and many have led to the frustration of the audit of the company's financial statements."
     By May 14, 2012, ChinaCast had revealed to the SEC its discovery of the illegal $120 million transfer. In it's 8-K report filed with the SEC, it stated that, "It is possible that some or all of the withdrawn cash could have been transferred to other company accounts that the current management does not currently have access to, or the cash could have been transferred out of the company's control. The company's current management team is continuing to try to obtain access to additional bank records and may find that significantly more unauthorized withdrawals may also have been made from the company's other bank accounts."
     The 8-K said the company trying to determine whether at least another $300 million in "cash and cash equivalents," withdrawals were used to make unauthorized payments.
     The class is represented by Laurence Rosen.