According to the law firm press release, the Complaint alleges that throughout the Class Period, defendants made materially false and misleading statements regarding the Company’s business operations, financial condition and prospects. Specifically, the Complaint alleges that the Company overstated its revenues and omitted to disclose significant related-party transactions. On November 12, 2009, the Company filed a Form 10-Q with the U.S. Securities and Exchange Commission (“SEC”) reporting its third quarter results. The 10-Q was false because it materially misstated the Company’s revenue and net income for the quarter. The Company’s Form 10-K, filed with the SEC on April 1, 2010, contained similar misstatements about the Company’s revenue and net income, in addition to concealing related-party transactions involving China Agritech’s Chief Executive Officer (“CEO”). The 10-K indicated that the Company purchased 15% and 12% of its raw materials from Shenzhen Hongchou Technology Company Ltd. (“Shenzehn Hongchou”) in fiscal 2009 and 2008, respectively. However, it failed to disclose that during that time, Defendant CEO owned 90% of Shenzhen Hongchou. Generally Accepted Accounting Principles, State of Financial Accounting Standards and SEC regulations all require the Company to disclose all material related-party transactions, which it failed to do.
However, the truth started to reveal itself regarding the accuracy of China Agritech’s financial statements. On February 3, 2011, the research firm LM Research published a report asserting that China Agritech was engaged in fraud. The report concluded that the Company’s financial statements were fraudulent, its purported revenue was overstated and that its plants were idle. As a result of the LM Research report, shares in China Agritech declined from a close of $10.78 on February 2, 2011 to $9.85 on February 3, 2011, on unusually high volume of over 2.6 million shares. Then, on February 15, 2011, Bronte Capital issued a scathing report presenting additional facts indicating that China Agritech was engaged in fraud and could not possibly have produced the revenue it claimed in its financial statements. As a result of the Bronte Capital report, shares in China Agritech declined from a close of $9.21 on February 15, 2011 to $7.44 on February 16, 2011, again on unusually high volume of over 2.8 million shares.
On March 13, 2011, China Agritech announced the formation of a Special Committee of its Board of Directors to investigate the allegations of fraud that the Company maintained had been made by third parties. The next day, China Agritech announced in a Form 8-K filed with the SEC that Ernst & Young Hua Ming (“E&Y”) had been dismissed as the Company’s independent auditor. In explaining its reasons for the dismissal, the Company revealed that it had, in essence, concealed that E&Y had identified serious problems with its financial statements as early as December 15, 2010 and had informed the Company’s board that an internal investigation was necessary. Yet, the Company failed to correct the problems with the financial statements and failed to provide verification for certain transactions – prompting “E&Y [to] orally advise the Audit Committee that it may not be able to rely on management’s representations based on the issues identified.”
Additionally, on March 14, 2011, the NASDAQ halted trading in China Agritech stock with its share price at $6.88 per share and initiated delisting proceedings. On May 20, 2011, after being delisted by the NASDAQ, China Agritech shares opened for trading on the pink sheets. That day, shares in China Agritech closed at $3.80 per share, a decline of $3.08 per share, or almost 45%.
On April 19, 2013, the Defendants' Motion to Transfer Case to Central District of California was GRANTED by the Court.