(CN) - A class action claims China-Biotics Inc. was infected with a toxic desire to artificially inflate its stock price and manipulate investors using a fake website and falsified bank statements and sales contracts.
"It is clear from the above that the company fabricated a false sales contract; a false bank website and a false bank advice in furtherance of its scheme to fraudulently create the appearance of having achieved a 50% growth in 2011 revenue as announced on Feb. 9, 2011," the complaint states, citing information from the company's former independent auditor, BDO Limited.
The auditors allegedly found gross irregularities that included a banking notice indicating math errors in the company's interest income because the company used different interest rates for deposits than those used by the national bank, and sales contracts with other companies that had the wrong purchaser's signatures affixed to them. While performing the audit, BDO claims that they were sent to a banking website created by the company to mislead them.
According to the company website, China-Bionics is headquartered in Shanghi and is one of that country's "largest suppliers of probiotics. Probiotics are beneficial, live bacteria used as dietary supplements and food additives to improve intestinal health and digestion."
However, when the company issued a press release announcing that it expected an incredible 50% increase in net sales for the 2011 fiscal year, things began to unravel.
"With our efforts and market prospects we are confident to achieve our full year sales target," the complaint states, quoting CEO Jinan Song.
The company, however, was unable to file its annual 10-K form because irregularities and "serious issues" were found by the audit firm that would require the company "to take certain actions and provide additional information."
China-Bionics filed a NT 10-K on June 10, 2011, explaining that it could not file a 10-K in a timely fashion and requested an extension for filing the 10-K.
"The company cannot predict at this time when it will be in a position to take all the actions and provide all the information requested," China-Biotics stated in its NT 10-K.
Plaintiffs claim that the company never intended to file a Form 10-K, and not "working to take all the actions and to provide the requested information" to its audit firm "as promptly as reasonably practical" as it claimed but rather "knew and concealed the fact that any bona fide earnings statement for the fiscal year ended March 31, 2011, would reflect a significant adverse change in the company's results of operations from the corresponding period for the previous fiscal year."
On June 15, the NASDAQ halted trading of China-Biotics while waiting "for additional information." At the close of the day, shares were listed at $3.46. NASDAQ then sent a letter to the company five days later stating that because China-Biotics had yet to comply and file a 10-K, the company would no longer be listed, at which poing shares dropped to a $1.
Though the company replied by filing a form 8-K and announced that it would be submitting a plan for compliance on or before July 15, 2011, the complaint states that this was never the board's intention because on June 23, they had "unanimously voted to voluntarily delist the company's common stock from the Nasdaq Global Stock Market." The company then received a letter from their audit firm resigning its position as independent auditor for China-Biotics.
The suit names CEO Song Jinan, CFO Travis Tao Cai, COO Hui Chang and executive vice president Yan Li as well as numerous company board directors.
The class is represented by Gregory Egleston in New York and Thomas McKenna of Gainey & McKenna also in New York.