Ambow Education Holding Inc., a Chinese school operator, was sued by investors who accuse the company of orchestrating a “fake acquisition” to facilitate an initial public offering in the U.S. The shares fell 17 percent in New York trading.
Byron Brown and other investors are seeking unspecified damages and legal fees on behalf of U.S. purchasers of Beijing-based Ambow’s American depositary receipts in connection with the Aug. 5, 2010, offering, according to an amended complaint filed Feb. 19 in federal court in Los Angeles.
Ambow, which runs elementary, middle and high schools, as well as colleges and career centers, wrongly said it had acquired Changsha Study School in 2008, while it actually paid “to borrow this school’s name and revenue for the IPO,” the plaintiffs allege.
“The cash for the purchase was secretly returned back to Ambow in the form of fake software sales,” according to the complaint, which cites statements from a member of the Changsha owner’s family and “reputable Chinese media” articles.
The company last reported earnings in July, when it posted a $12.7 million net loss for the first quarter. As a so-called foreign private issuer, the company isn’t required to file quarterly financial results, according to spokeswoman Mandy Li in Beijing. It is obliged to report results by the end of April, Li said when contacted by e-mail Jan. 30.
Li didn’t immediately respond today to an e-mail seeking comment on the amended complaint.
Ambow said July 5 that it would conduct an internal investigation into allegations by a former employee of financial impropriety and wrongful conduct in connection with the purchase of a training school in 2008. The company said in a filing that it wouldn’t comment until the probe was complete.
The company has cited the investigation as the reason for its lack of financial updates, according Trace Urdan, a senior analyst at Wells Fargo & Co. in San Francisco, who suspended coverage of Ambow on Feb. 12.
“Given the lack of concrete information from the company, we no longer believe we can reasonably provide an investment rating on the stock,” Urdan, who previously rated the shares the equivalent of buy, said in the note. “The company has told us only that management is not involved in the details of the investigation and it ‘hopes’ it will be concluded soon.”
Ambow’s ADRs tumbled 26 cents to $1.30 in New York trading, the lowest close on record. ADRs of Ambow debuted in August 2010, when they started trading at $10 each. The company’s market value has plunged 87 percent since then.
The case is Brown v. Ambow Education Holding Ltd., 12-cv-5062, U.S. District Court, Central District of California (Los Angeles).