Chinese reverse merger lawsuit dismissed
Reprints
LOS ANGELES—A federal judge has dismissed a lawsuit filed against a Chinese reverse merger company, which shareholders had accused of securities violations arising from its initial public offering, but the judge also said the complaint can be amended and refilled.
According to the Nov. 30 ruling by U.S. District Court Judge John A. Kronstadt, the Beijing-based company is a U.S. firm that sells advertising on Chinese television. China Dragon filed its registration statement with the Securities and Exchange Commission in February.
There were disparities, though, between the revenues it reported in the prospectus and its filings with the Chinese state administration, with the latter being significantly less. This was a focus of the litigation.
China Dragon stock began trading in February. In March, the New York Stock Exchange Amex Equities, an NYSE unit, stopped Chinese Dragon's trading and began proceedings to delist the company a week later, according to the ruling.
Meanwhile, the company's auditor, Houston-based MaloneBailey L.L.P., issued a resignation letter indicating the company's accounting records had been falsified and that were discrepancies in its fiscal year 2010 financial audit.
In addition, the SEC in June said it had instituted proceedings to determine whether a stop order should be issued suspending the effectiveness of the company's registration statements.
The judge granted China Dragon's motion to dismiss the case without prejudice, which means it can amended and refiled. Judge Kronstadt said in his ruling that the plaintiffs had “not adequately pleaded” their allegations in the original complaint.
The lawsuit originally was reported by Kevin LaCroix, executive vp at OakBridge Insurance Services L.L.C. in Beachwood, Ohio, in his blog, The D&O Diary.
Observers have said the mounting litigation filed against Chinese reverse merger firms could contribute to a harder directors and officers liability insurance market.
