SEC Complaint
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Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 1 of 40 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA : UNITED STATES SECURITIES AND : EXCHANGE COMMISSION : 950 East Paces Ferry Road, N.E., Suite 900, : Atlanta, GA 30326 : : Civil Action No. Plaintiff, : 1:13-CV-1598 v. : : : YUHE INTERNATIONAL, INC. : 301 Hailong Street : JURY TRIAL Hanting District, Weifang, Shandong Province : DEMANDED The People’s Republic of China, : : and : : GAO ZHENTAO : Chief Executive Officer : Yuhe International, Inc., : 301 Hailong Street : Hanting District, Weifang, Shandong Province : The People’s Republic of China, : : Defendants. : : COMPLAINT FOR INJUNCTIVE RELIEF Plaintiff, the United States Securities and Exchange Commission (“Commission”), files its complaint and alleges the following against Defendants Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 2 of 40 Yuhe International, Inc. (“Yuhe”) and Yuhe’s Chief Executive Officer (“CEO”) Gao Zhentao (“Gao”): OVERVIEW 1. This case concerns false public statements made by Yuhe, a China-based company under Gao’s direction and control whose stock, during the relevant time, traded in the United States on the NASDAQ. 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. 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. 2. Yuhe claims to be the largest supplier of day-old chickens in China. In December 2009, Yuhe announced that it had entered into an agreement with Weifang Dajiang Corporation (“Dajiang”) to acquire thirteen chicken breeder farms (the “Dajiang Acquisition”) for approximately $15.2 million, of which $12.1 million was allegedly paid immediately to Dajiang. The remainder was to be paid after formal delivery of the farms. 2 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 3 of 40 3. Yuhe continued to tout the Dajiang Acquisition in Commission filings during 2010 and 2011, providing updates concerning the farms’ renovation, integration, and contribution to the company’s revenue, and stating that the acquired farms would increase Yuhe’s production capacity by 60%. In October 2010, Yuhe completed a public offering in the United States, selling more than four million shares of its common stock and generating net proceeds in excess of $27 million. 4. In June 2011, a research company published a report on an investing website that claimed the Dajiang Acquisition never occurred. Yuhe fought back; Gao and others held a call with investors and issued two press releases denying the report’s contents. 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. 5. 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 3 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 4 of 40 impact the financials of the Company and hence no[t result in] volatility in the share price.” 6. 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% and a decline in market capitalization of approximately $58 million – before NASDAQ halted trading later that day. NASDAQ subsequently delisted Yuhe’s common stock. 7. On July 21, 2011, Yuhe’s Audit Committee retained independent outside counsel to conduct an internal investigation. The internal investigation determined, among other things, that more than $10 million had been diverted, Yuhe’s bank statements had been falsified, it was not clear whether funds ever had been used to buy any farms, and Gao had failed to disclose any of these facts to the Board. 8. In September 2012, the Audit Committee recommended that the Board implement certain remedial measures. In December 2012, Gao refused, and, as a result, on January 7, 2013, the three members of the Audit Committee resigned. 9. As of October 2013, Gao apparently remains in control of the company. 4 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 5 of 40 VIOLATIONS AND RELIEF SOUGHT 10. By engaging in the conduct alleged herein, Defendant Yuhe violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §77q(a)], Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), 78m(b)(2)(B) and 78n(a)], and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 14a-3, and 14a-9, thereunder [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-11, 240.13a- 13, 240.14a-3 and 240.14a-9]. 11. By engaging in the conduct alleged herein, Defendant Gao violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §77q(a)], Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78j(b), 78m(b)(5) and 78n(a)], and Rules 10b-5, 13a-14, 13b2-1, 14a- 3, and 14a-9, thereunder [17 C.F.R. §§ 240.10b-5, 240.13a-14, 240.13b2-1, 240.14a-3 and 240.14a-9], and aided and abetted Yuhe’s violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 14a-3, and 14a- 5 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 6 of 40 9, thereunder [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-11, 240.13a-13, 240.14a-3 and 240.14a-9]. 12. Based on these violations, the Commission seeks: (1) entry of a permanent injunction prohibiting the Defendants from further violations of the relevant provisions of the federal securities laws; (2) disgorgement of ill-gotten gains, plus prejudgment interest; (3) the imposition of civil monetary penalties due to the egregious nature of the violations; (4) the imposition of an officer and director bar against Defendant Gao; and (5) such other relief as the Court deems just and proper. JURISDICTION AND VENUE 13. The Commission brings this action pursuant to the enforcement authority conferred upon it by Sections 20 and 22 of the Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21(d) and 21(e) of the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)]. 14. This Court has jurisdiction over this action pursuant to Section 22 of the Securities Act [15 U.S.C. § 77v] and Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. 6 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 7 of 40 15. Venue is proper in this district pursuant to Section 22 of the Securities Act, Section 27 of the Exchange Act and 28 U.S.C. § 1391 because certain acts, practices, transactions and courses of business constituting the violations occurred in the District of Columbia, including without limitation, Yuhe filing its required reports with the Commission. 16. In connection with the conduct alleged in this Complaint, Defendants Yuhe and Gao, directly and indirectly, made use of the mails, the means or instruments of transportation or communication in interstate commerce, the means or instrumentalities of interstate commerce, or the facilities of a national securities exchange. 17. Unless restrained and enjoined by this Court, Defendants Yuhe and Gao will continue to engage in the securities law violations alleged herein, or in similar conduct that would violate the federal securities laws. THE DEFENDANTS 18. Yuhe International, Inc. is a Nevada corporation whose principal offices are located in Weifang, Shandong Province, China. Yuhe sells broilers – chickens that are bred and raised for meat production – and claims to be the largest supplier of 7 Case 1:13-cv-01598-RCL Document 1 Filed 10/18/13 Page 8 of 40 day-old broilers in China. All of Yuhe’s operations are carried out in China. Until May 16, 2011, when Yuhe filed its Form 10-Q for the period ended March 31, 2011, Yuhe regularly filed periodic financial reports with the Commission. According to its December 31, 2010 Form 10-K, Yuhe had total annual revenues of $67.5 million and assets of $131.2 million. 19. Yuhe entered the U.S. securities market in March 2008 through a reverse merger with a Nevada shell corporation. Yuhe’s common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act, and its common stock traded on the NASDAQ under the ticker symbol “YUII.” On October 20, 2010, Yuhe completed a registered public offering in the United States of more than four million shares of its common stock at a price of $7 per share, raising approximately $27 million.