ChinaCast Education Corp. sued its former chairman over claims he and others stole more than $150 million of the online education company’s funds and assets over a four-year period.
Chan Tze Ngon, ChinaCast’s founder and former chairman, and Jiang Xiangyuan, the company’s chief investment officer, misappropriated more than $64 million raised in U.S. stock offerings starting in 2008 by transferring the funds to companies they owned personally, ChinaCast said in a Delaware Chancery Court lawsuit.
Chan and Jiang also transferred ownership of three Chinese colleges ChinaCast bought to associates outside the company once newly elected directors took steps to oust the men, according to the complaint filed yesterday in Wilmington. “As a result of these transfers, ChinaCast no longer owns its three most significant revenue-generating assets,” officials said in the suit.
The suit comes almost a year after the U.S. Securities and Exchange Commission sued Chan and Jiang over similar misappropriation claims. Regulators said Chan transferred funds to a unit in which he secretly held a controlling 50 percent stake and pledged more than $30 million of ChinaCast’s cash to secure debts of entities unrelated to the company.
The agency also accused Jiang of avoiding more than $200,000 in losses by illegally using confidential information in deciding to sell company shares.
ChinaCast, according to the SEC, entered U.S. capital markets in 2006 through a reverse merger, in which a closely held firm buys a shell company already on an exchange in order to list shares without a public offering. Reverse mergers, particularly those involving China-based firms, have been under increased regulatory scrutiny for years.
The Hong Kong-based company had a market capitalization of more than $200 million before the alleged frauds were uncovered after a newly elected board took control of the e-learning firm in 2012, company officials said in the suit.
Ned Sherwood, an independent ChinaCast director, sued in Delaware in 2011 to stop Chan’s effort to remove him from the board and to bar shareholders from considering electing new directors. Delaware Chancery Judge Donald Parsons ruled for Sherwood, which cleared the way for he and his slate of candidates to be added to the shareholders’ ballot.
Faced with the loss of control of ChinaCast, Chan and Jiang transferred control of the Foreign Trade and Business College of Chongqing Normal University, Lijiang College of Guangxi Normal University and Hubei Industrial University Business College to associates outside the company, according to the suit. The illegal transfers caused more than $120 million in damages, company officials added.
The company’s problems caused Nasdaq to suspend trading in ChinaCast’s shares in April 2012 and the company was delisted two months later, according to the suit.
Deloitte & Touche LLP, ChinaCast’s auditors, were sued by a group of investment funds in Manhattan federal court last year for failing to uncover fraud at the company that caused millions in losses.
In the Delaware case, ChinaCast officials accuse Chan, Jiang and other former executives of breaching legal duties to shareholders by misappropriating funds raised from investors, illegally diverting the company’s cash reserves and mishandling assets such as the colleges. Those actions were taken over a four-year period starting in 2008, according to the suit.
The case is ChinaCast Education Corp. v. Ron Chan Tze Ngon, CA 10063, Delaware Chancery Court (Wilmington).