China Sky One Medical Inc. and its top executives have been sued by the U.S. Securities and Exchange Commission over claims they inflated revenue by about $20 million with fake sales of a weight-loss product.
The pharmaceutical products firm, which began trading on U.S. markets after a 2006 reverse merger, claimed in 2007 that a Malaysian company would become exclusive distributor of its “slim patch,” generating $1 million per month in sales, the SEC said today in a lawsuit filed at federal court in California. Chief Executive Officer Yan-qing Liu certified the false statements, which appeared in company disclosures through 2010 and continue to impact its balance sheet, the SEC said.
The agency’s suit against China Sky is the latest in a series of regulatory actions targeting financial statements from Chinese companies listed on U.S. exchanges. Several companies have been delisted and the SEC has sued auditors for failing to hand over information on firms.
“Accurate and reliable financial reporting is the bedrock of our capital markets,” John McCoy III, associate director of the SEC’s regional office in Los Angeles, said in a statement. “CSKI made a mockery of that by blatantly fabricating sales and overstating its financial results.”
The company recorded $19.8 million in revenue from Malaysian sales in 2007 and 2008, while the distributor bought only $167,542 in slim patches during that period. The SEC is seeking financial penalties against China Sky and Liu, and is also asking the executive to disgorge ill-gotten gains.
China Sky One released a statement in February saying that Liu was being treated for a life-threatening illness and that the time he would spend working would be “substantially reduced.” The firm also said that 26 mid-level managers had recently resigned, including nine from its accounting unit and two from internal controls, according to the statement.
A phone call outside of normal business hours to a number listed for the Harbin, China-based company, wasn’t answered. James Masella III, an attorney at law firm Blank Rome LLP in New York who was listed by the SEC as defense counsel, said he isn’t currently retained by the company in the matter.