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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 1 of 25
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK JRP FPCHWALD
DAVID CASPER, Individually And On Behalf. Of All Others Similarly Situated,
Plaintiff,
VS.
SONG JINAN, TAO (TRAVIS) CAT, HUT S. CHANG, CHIN JI WEI, DU WEN MIN, SIMON YICK, YAN LI, and CHINA-BIOTICS, INC.,
Defendants.
&ivil
6' VT JURY DEMANDED
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Plaintiff alleges alleges the following based upon the investigation by Plaintiffs counsel, which
includes, among other things: a review of the Defendants' public documents, media interviews
and reports, United States Securities and Exchange Commission ("SEC") filings, wire and press
releases published by and regarding China-Biotics, Inc. ("China-Biotics" or the "Company"),
securities analysts' reports and advisories about the Company, and information readily available
on the Internet. Plaintiff believes that substantial additional evidentiary support will exist for the
allegations set forth herein after a reasonable opportunity for discovery.
NATURE OF THE ACTION AND OVERVIEW
1. This is a federal class action on behalf of purchasers (the "Class") of the common
stock of China-Biotics, who purchased or otherwise acquired the Company's common stock
between February 9, 2011 and July 1, 2011, inclusive (the "Class Period"), seeking to pursue
remedies under the Securities Exchange Act of 1934 (the "Exchange Act").
Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 2 of 25
JURISDICTION AND VENUE
2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act, (15 U.S.C. §§ 78j(b) and 78t(a)), and Rule lob-S promulgated under Section
10(b) of the Exchange Act (17 C.F.R. § 240, II Ob-5).
3. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Exchange Act (15 U.S.C. § 78aa), and 28 U.S.C. § 1331.
4. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange
Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged
herein, including the preparation and dissemination of materially false and misleading
information, occurred in substantial part in this Judicial District. China Biotics shares traded on
the NASDAQ.
5. In connection with the acts, conduct and other wrongs alleged in this Complaint,
Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mails, interstate telephone communications and
the facilities of the national securities exchange.
PARTIES
6. Plaintiff David Casper purchased China-Biotics common stock at artificially
inflated prices during the Class Period and has been damaged thereby.
7. Defendant China-IJiotics engages in the research, development, production,
marketing, and distribution of probiotics products in the People's Republic of China.
8. Defendant Song Jinan ("Jinan") was, at all relevant times, Chief Executive
Officer and Chairman of the Board of Directors of the Company
Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 3 of 25
9. Defendant Tao (Travis) Cai ("Cai") was, at all relevant times, Chief Financial
Officer of the Company.
10. Defendant Hui S. Chang ("Chang") was, at all relevant times, Chief Operating
Officer of the Company.
11. Defendant Chin Ji Wei ("Wei"), was, at all relevant times, a Director and
member of the Company's Audit Committee.
12, Defendant Pit Wen Mm ("Mm") was, at all relevant times, a Director and
member of the Company's Audit Committee.
13, Defendant Simon lick ("Yick") was, at all relevant times, a Director and member
of the Company's Audit Committee.
14, Defendant Yan Li ("Li") was, at all relevant times, Executive Vice President of
the Company and the spouse of Defendant Jinan.
15, Defendants Jinan, Cai, Chang, Wei, Min, Yick, and Li are herein collectively
referred to as the "Individual Defendants."
16. The Individual Defendants and China-Biotics are collectively referred to herein as
"Defendants."
SUBSTANTIVE ALLEGATIONS
17. On February 9, 2011, China-Biotics issued a press release announcing an
expectation of a phenomenal 50% growth in 2011 revenue:
Outlook for the Fiscal Year 2011
For fiscal year 2011, management maintains the expectation for net sales to achieve at least 50% year-over-year growth. This target is based on the Company's current views on the operating and market conditions, which are subject to change.
Mr. Jinan Song, Chairman and CEO of China-Biotics, concluded, "Entering into the fiscal fourth quarter of 2011, we are making
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 4 of 25
greater efforts to ramp up the production of bulk products to meet the rising demand from the domestic dairy and animal feed markets. With the ongoing holiday seasons, we also expect strong retail products sales for the quarter. We continue to expand the presence of our retail probiotic products into other key regions in China. We believe that, with the right distributors and sales channels, the market potential for our retail products is much larger in China. With our efforts and market prospects, we are confident to achieve our full year sales target."
(Emphasis added).
18. The Company's February 9, 2011 press release was appended to a Form 8-K,
signed by Defendant Jinan, which the Company filed with the SEC on February 10, 2011.
19. The February 9, 2011 press release was materially false and misleading because,
but for financial fraud, the Company's books and records could not possibly reflect a 50%
revenue growth.
20. On June 15, 2011, the Company filed a Form NT 10-K ("Notification of inability
to timely file Form 10-K ") with the SEC. This document, which was signed by Defendant
Jinan, stated:
China-Biotics, Inc. (the "Company") was unable to timely file its Annual Report on Form 10-K for the period ended March 31, 2011 (the "Form 10-K") by the prescribed due date of June 14, 2011. On June 10, 2011, the Company's auditor, BDO Limited ("BDO"), notified the Company and the Company's Audit Committee that it had identified certain serious issues as part of its ongoing audit work and would need the Company to take certain actions and provide additional information. The Company's Audit Committee is investigating the issues raised in BDO's June 10 letter, as well as other matters, The Company has been discussing these issues with IWO and is working to take all of the actions and to provide the requested information to BOO as promptly as reasonably practicable. The Company cannot predict at this time when it will be in a position to take all of the actions and provide all of the information requested by BDO. The Company intends to file the Form 10-K as soon as reasonably practicable.
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 5 of 25
Until the review of the issues identified with respect to the pending audit of the Company's financial statements is completed, the Company is unable to determine whether the earnings statements to be included in the Form I 0-K will reflect any significant change in the Company's results of operations from the corresponding period for the last fiscal year.
(Emphasis added).
21. The June 15, 2011 Form NT 10-K was materially false and misleading because
the Company:
(a) was not working to take all of the actions and to provide the requested
information to BDO Limited ("BDO") as promptly as reasonably practicable;
(b) did not intend to file its Form 10-K for the fiscal year ended March 31,
2011; and
(c) knew and concealed the fact that any bona fide earnings statement for the
fiscal year ended March 31, 2011 would reflect a significant adverse change in the
Company's results of operations from the corresponding period for the previous fiscal
year.
22. On June 15, 2011, the NASDAQ Stock Market(R) announced that trading was
halted in China-Biotics (Nasdaq: CHBT) at 15:39:29 p.m., Eastern Time, for "additional
information requested" from the Company. The last price of the Company's stock was $3.46,
According to NASDAQ, trading in the Company's stock was to remain halted until China-
Biotics fully satisfied NASDAQ's request for the additional information.
23. Unbeknownst to the investing public, the Company had no intention of furnishing
the requested information to NASDAQ.
24. On June 23, 2011, the Company filed a Form 8-K announcing that, on June 20,
2011, the Company received a letter from the NASDAQ Listing Qualification staff asserting
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 6 of 25
that, because the Company had not yet filed its Annual Report on Form 10-K for the fiscal year
ended March 31, 2013, and based upon disclosures made by the Company in its recently filed
Form 12b-25 and additional information provided to NASDAQ, the Company no longer
complied with NASDAQ Listing Rule 525 0(c)(1) for continued listing. This Form 8-K, which
was signed by Defendant Jinan, also stated that the NASDAQ letter requested that the Company
provide to NASDAQ a formal "plan of compliance" (by July 5, 2011) setting forth the steps that
the Company proposes to take to regain compliance for continued listing of the Company's
common stock on the NASDAQ, as well as certain other information relevant to NASDAQ's
evaluation of the plan of compliance. This Form 8-K stated:
The Company will use its best efforts to submit a plan of compliance to NASDAQ, together with the other information requested, on or before July 5, 2011.
25. The foregoing statement was materially false and misleading because the
Company had no intention of ever submitting a plan of compliance to NASDAQ, or furnishing
NASDAQ with the other information requested. As later disclosed by the Company, on June
23, 2011, the Company's Board of Directors "unanimously voted to voluntarily delist the
Company's common stock from the Nasdaq Global Stock Market ('Nasdaq')."
26. On June 23, 2011, the Company filed a second Form 8-K announcing that it
received a letter of resignation from BDO Limited ("BDO") stating that it had resigned as the
Company's independent auditor. According to this Form 8-K, which was signed by Defendant
Jinan, the BDO letter of resignation stated that BDO informed the Company that its resignation
was based on its:
(a) determination that certain irregularities (identified in a letter dated June
10, 2011 from BDO to the Company) likely constitute illegal acts that could have a
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 7 of 25
material effect on the financial statements of the Company for the purposes of Section
IOA of the Securities Exchange Act of 1934, as amended; and
(b) conclusion that the Company's Board of Directors and Audit Committee
had not taken timely and appropriate remedial actions in respect of the alleged illegal
acts. The Resignation Letter further states that, as a result of such failure to take
appropriate remedial actions, it is impossible for BDO to gather evidence to assess
whether the Company's accounting records have been falsified and whether there are
other issues that could have a material effect on the financial statements of the Company.
27. The irregularities identified by BDO in the June 10th Letter consisted of the
following
(a) In a Company sales contract, the purchaser's chop (i.e., the official
signature or seal) affixed on the signature page of the sales contract belonged to a
different company than the one named in the sales contract;
(b) In connection with BDO's review of the Company's bank account through
the Company's c-banking system using the Company's computer, BDO was directed by
the Company to access a suspected fake website for the bank;
(c) A bank advice dated March 21, 2011 documenting a portion of the
Company's interest income contained mathematical errors that the Company's
management dismissed as clerical mistakes made by the bank; the Company later
replaced it with a "corrected" advice from the bank; and
(d) The aforementioned bank advice, dated March 21, 2011 used a deposit
interest rate to calculate the interest income earned by the Company (as presented to
BDO by the Company's Executive Vice President, Ms. Yan Li), which differed from the
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 8 of 25
interest rate announced by the People's Bank of China for the relevant deposit period as
referred to in an undated deposit agreement that was presented to BDO to corroborate the
Company's interest income.
28. The June 23, 2011 Form NT 10-K contained appended correspondence from BDO
which further disclosed that:
(a) During April 2011, the Company purportedly established a special
committee to investigate allegations of fraud engaged the services of Deloitte and Jun to
undertake a forensic investigation of the Company's books and records and, contrary to
the wishes of DDO, did not disclose this information to the investing public.
(b) The Company did not furnish BDO with any information concerning the
specifics of the purported forensic investigation, and the Company refused to authorize
BDO to communicate with Deloitte and Jun regarding the purported forensic
investigation.
(c) On May 19, 2011, BDO notified the Company's Audit Committee that its
audit was not likely to be completed by the filing date of the Company's Form 10-K
because it required the results of the purported forensic investigation, managements'
responsiveness to BDO's request for cooperation in the performance of its audit.
(d) On June 10, 2011, BDO asked the Company's Audit Committee and
Board of Directors to: (i) investigate the above described irregularities that were
identified by BDO and provide 13D0 with the results of the investigation, and (ii) notify
Deloitte and Jun of the irregularities in order to allow it to incorporate the BDO identified
irregularities into its forensic investigation.
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 9 of 25
(e) From June 10, 2011 through June 22, 2011 (when BDO resigned), BDO
repeatedly requested information from Company officers (including Defendants Jinan,
Cai, Chang and Yan) and members of the Company's Audit Committee (including
Defendants Wei, Min and Yik) regarding the irregularities and the results of the forensic
investigation, and received none.
29. It is clear from the above that the Company fabricated a false sales contract, a
false bank website, and a false bank advice in furtherance of its scheme to fraudulently create
the appearance of having achieved a 50% growth in 2011 revenue as announced on February 9,
2011 and that, having detected evidence of the Company's fraud, Defendants had no intention
of permitting BDO to complete its audit.
30. On June 28, 2011, the Company filed a Form 8-K which stated:
On June 23, 2011, Mr. Simon Yick submitted to China-Biotics, Inc. (the "Company") his resignation as an independent non-executive director of the Company and as the Chairman of the Audit Committee of the Company's Board of Directors (the "Audit Committee"), effective immediately. Mr. Yick also served as the financial expert for the Audit Committee and as a member of the Compensation Committee of the Company's Board of Directors. Mr. Yick no longer holds any positions with the Company. Mr. Yick informed the Company that his resignation was based on certain (i) events leading up to the resignation of BDO Limited as the Company's auditor ("BDO"); and (ii) issues that the Company must resolve in order to comply with its obligation to file its Annual Report on Form 10-K for the period ended March 31, 2011 (the "10-K").
31. On June 29, 2011, the Company filed a Form 8-K, signed by Defendant Jinan,
which stated:
On June 23, 2011, the Board of Directors (the "Board") of China-Bioties, Inc. (the "Company") unanimously voted to voluntarily delist the Company's common stock from the Nasdaq Global Stock Market ("Nasdaq"). The Board has determined that maintaining the listing of the Company's common stock on
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 10 of 25
Nasdaq has imposed difficult burdens on the Company. These burdens have been compounded by the recent resignations of the Company's former auditor, BDO Limited, and the Company's Chief Financial Officer, Travis Cai, as disclosed by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on June 23, 2011, as well as the resignation of Mr. Simon Yick, the former Chairman of the Audit Committee of the Board, as disclosed by the Company in a Current Report on Form 8-K filed with the SEC on June 28, 2011.
Pursuant to Nasdaq Marketplace Rule 58400) and Rule 12d2-2(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on June 29, 2011, the Company provided written notice to Nasdaq of its intent to file a Notification of Removal from Listing on Form 25 ("Form 25") with the SEC on or around July 11, 2011. The Company expects the delisting from Nasdaq to become effective on July 21, 2011, ten days after filing Form 25 with the SEC.
Upon delisting from Nasdaq, the Company expects that trading by stockholders of shares of the Company's common stock may be effected through quotations on the Pink OTC Market (a centralized quotation service that collects and publishes market maker quotes for securities). This will require a least one market maker to quote the Company's common stock on the Pink OTC Market after the market maker complies with the Pink OTC Market rules; there is no assurance that a market maker will comply with those rules. The Company has not arranged for its shares to be quoted on any securities exchange. Notwithstanding any of the foregoing, the Company will remain subject to the periodic reporting requirements of the Exchange Act.
The Company previously reported its receipt from Nasdaq of a letter (the "Nasdaq Letter") stating that, because the Company has not yet filed its Annual Report on Form 10-K for the fiscal year ended March 31, 2011, and based upon disclosures made by the Company in its recently filed Form 12b-25 and additional information provided to Nasdaq, the Company no longer complies with Nasdaq Listing Rules for continued listing. In addition, the Nasdaq Letter requested that the Company provide to Nasdaq a formal "plan of compliance" setting forth the steps that the Company proposes to take to regain compliance for continued listing of the Company's common stock on Nasdaq, as well as certain other information relevant to Nasdaq' s evaluation of the plan of compliance. In light of the Company's decision to seek voluntary delisting of its stock from Nasdaq, the Company has
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 11 of 25
determined that it will not provide Nasdaq with such plan of compliance or other requested information.
The Board has determined that the effort required to challenge Nasdaq's determination, and the uncertain outcome of any such challenge, as well as the uncertainty of when, if ever, the Company will be able to satisfy Nasdaq's concerns in light of the recent resignation of its auditor, support its decision to seek delisting of its common stock from Nasdaq in the best interests of the Company and its stockholders.
32. The stock resumed trading on the Pink Sheets on July 1, 2011 and opened at a
$1.00 per share, which was more than a 70% drop from the last trade price of $3.46 per share
prior to the halt. Trading was heavy with 5.8M shares changing hands. The massive drop was
in recognition of disclosure of the previously concealed adverse information and false
representations specified above which came to light during the fifteen day trading halt.
POST CLASS PERIOD OCCURRENCES
33, On July 21, 2011, the Company's common stock was formally delisted from the
Nasdaq Global Stock Market.
34. On August 10, 2011, the Company filed a Form NT 10-K ("Notification of
inability to timely file Form lOQ") which was signed by Defendant Jinan. This document
stated:
China-Biotics, Inc. (the "Company") was unable to timely file its Quarterly Report on Form 10-Q for the period ended June 30, 2011 (the "Form 10Q") by the prescribed due date of August 9, 2011 as a result of the Company's inability to provide audited financial statements for the fiscal year ended March 31, 2011. The Company was unable to provide audited financial statements due to the resignation of it independent auditor, BDO Limited, on June 22, 2011. The Company has not yet retained a new auditor.
Until a new auditor is retained and an audit of the Company's financial statements is completed, the Company will be unable to provide the necessary financial statements to file the Form iQ-Q. At this time, the Company cannot predict when it will be in a
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 12 of 25
position to file the Form 10-Q, but it intends to file the Form 10-Q as soon as reasonably practicable.
35. On September 20, 2011, the Company filed a Form 8-K with the SEC which
stated:
On September 15, 2011, the staff of the U.S. Securities and Exchange Commission (the "SEC") informed China-Biotics, Inc. (the "Company") that it intended to recommend that the Commission institute a public administrative proceeding against the Company for alleged violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules l3a-1 and 13a-13 or 13a-16 promulgated thereunder. In connection with the contemplated administrative proceeding, the staff may seek to suspend or revoke the registration of each class of the Company's securities and issue an order suspending for ten days the trading in the Company's securities. In accordance with Rule 5(e) of the Commission's Rules on Informal and Other Procedures, the staff has offered the Company the opportunity to make a Wells submission.
36. On October 7, 2011, the SEC issued an Order Instituting Administrative
Proceedings and Notice of Hearing Pursuant to Section 120) of the Securities Exchange Act of
1934 against the Company. The Order found that the Company was delinquent in its periodic
filings with the SEC, having not filed any periodic reports since it filed a Form 10-Q for the
quarterly period ended December 31, 2010, The SEC also announced the issuance of an Order
of Suspension of Trading Pursuant to Section 12(k) of the Securities Exchange Act of 1934
(Order of Suspension) against the Company. The Order of Suspension found that there was a
lack of current and accurate information concerning the securities of China-Biotics because it
had been delinquent in its required periodic reports since February 2011. Based on these facts,
the Order suspended the trading in the securities of China-Biotics for the period of October 7,
2011 through October 20, 2011. (Trading Suspension (Rd. 34-65509); Administrative
Proceeding (Rel. 34-65510; File No 3-1458 1).
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 13 of 25
37. On November 9, 2011, the Company filed a Form NT 10-K ("Notification of
inability to timely file Form 10-Q") with the SEC. This document, which was signed by
Defendant Jinan, stated:
China-B iotics, Inc. (the "Company") was unable to timely file its Quarterly Report on Form 10-Q for the period ended September 30, 2011 (the "Form 10-Q") by the prescribed due date of November 9, 2011 as a result of the Company's inability to provide audited financial statements for the fiscal year ended March 31, 2011. The Company was unable to provide audited financial statements due to the resignation of its independent auditor, BDO Limited, on June 22, 2011 The Company has not yet retained a new auditor.
Until a new auditor is retained and an audit of the Company's financial statements is completed, the Company will be unable to provide the necessary financial statements to file the Form 10-Q. At this time, the Company cannot predict when it will be in a position to file the Form l0-Q, but it intends to file the Form 1 0-Q as soon as reasonably practicable.
38. On February 9, 2012, the Company filed a Form NT 10-K ("Notification of
inability to timely file Form 10-Q") with the SEC. This document, which was signed by
Defendant Jinan, stated:
China-Biotics, Inc. (the "Company") is unable to timely file its Quarterly Report on Form 10-Q for the period ended December 31, 2011 (the "Form 10-Q") by the prescribed due date of February 9, 2012 as a result of the Company's inability to provide audited financial statements for the fiscal year ended March 31, 2011. The Company is unable to provide audited financial statements due to the resignation of it independent auditor, BDO Limited, on June 22, 2011. The Company has not yet retained a new auditor.
Until a new auditor is retained and an audit of the Company's financial statements is completed, the Company will be unable to provide the necessary financial statements to file the Form 1 O-Q, At this time, the Company cannot predict when it will be in a position to file the Form 10-Q, but it intends to file the Form 10-Q as soon as reasonably practicable.
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39, On February 22, 2012, the SEC published its Initial Decision Release No. 454,
Administrative Proceeding File revoking the registration of the registered securities of China
Biotics stating: "The revocation is based on China-Biotics' failure to file required periodic
reports with the Securities and Exchange Commission (Commission)."
PLAINTIFF'S CLASS ACTION ALLEGATLON
40. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired China-Biotics' securities between February 9, 2011 and July 1, 2011,
inclusive, seeking to pursue remedies under the Exchange Act.
41. The members of the Class are so numerous that joinder of all members is
impracticable. As of June 7, 2010, there were 22,370,000 shares of China-Biotics common
stock outstanding. While the exact number of Class members is unknown to Plaintiff at this
time and can only be ascertained through appropriate discovery, Plaintiff believes that there are
hundreds or thousands of members in the proposed Class, Record owners and other members of
the Class may be identified from records maintained by China-Biotics or its transfer agent and
may be notified of the pendency of this action by mail, using the form of notice similar to that
customarily used in securities class actions.
42. Plaintiff's claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants' wrongful conduct in violation of
federal law that is complained of herein.
43. Plaintiff will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class and securities litigation.
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 15 of 25
44. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants' acts as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and
management of China-Biotics; and
(e) whether the members of the Class have sustained damages and, if so, the
proper measure of damages.
45. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action
as a class action.
LOSS CAUSATION
46. Defendants' wrongful conduct, as alleged herein, directly and proximately caused
the economic loss suffered by Plaintiff and the Class.
47. During the Class Period, Plaintiff and the Class purchased common stock of
China-B iotics at artificially inflated prices and were damaged thereby. The price of China-
Biotics' common stock significantly declined when the misrepresentations made to the market,
and/or the information alleged herein to have been concealed from the market, and/or the effects
thereof, were revealed, causing investors' losses.
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SCI1NTER ALLEGATIONS
48. Defendants acted with scienter because they: (1) knew that the public statements
issued or disseminated by Defendants in the name of the Company were materially false and
misleading; (ii) knew that such statements would be issued or disseminated to the investing
public; and (iii) knowingly and substantially participated or acquiesced in the issuance or
dissemination of such statements or documents as primary violations of the federal securities
laws.
49. As set forth herein, the Individual Defendants, by virtue of their receipt of
information reflecting the true facts regarding China-Biotics, their control over, receipt and/or
modification of China-l3iotics' allegedly materially misleading statements and omissions,
and/or their positions with the Company which made them privy to confidential information
concerning China-Biotics, participated in the fraudulent scheme alleged herein..
SO. Each of the named defendants has actual knowledge of the irregularities identified
byBDO.
51. The irregularities (fictitious online banking records, fictitious bank document, and
fictitious sales contract) identified by BDO pierced the core of the Company's financial
accounting system, rendered the Company's accounting system highly questionable, and
evidenced a complete lack of internal controls. Despite these facts, in order to conceal the
Company's fraud, each of the named defendants failed to provide BDO with the information
which it required to complete its audit.
52. Each of the named defendants opted to stop providing the investing public and the
SEC with audited financial information because doing so would constitute an admission of
fraud. Instead they allowed NASDAQ to delist the Company's securities and the allowed the
SEC to revoke the registration of the registered securities of the Company
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Applicability of Presumption of Reliance: Fraud On The Market Doctrine
53. At all relevant times, the market for China-Biotics' securities was an efficient
market for the following reasons, among others:
(a) China-Biotics stock trades on the NASDAQ with trading volume of in the
hundreds of thousands and millions of shares throughout the Class Period;
(b) As a regulated issuer, China-Biotics filed periodic public reports with the
SEC;
(c) China-B lotics regularly communicated with public investors via
established market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major newswire services and
through other wide-ranging public disclosures, such as communications with the financial
press and other similar reporting services; and
(d) China-Biotics was followed by several securities analysts during the Class
Period which were publicly available and entered the public marketplace.
54. As a result of the foregoing, the market for China-Biotics' common stock
promptly digested current information regarding China-Biotics from all publicly-available
sources and reflected such information in China-Biotics' stock price. Under these
circumstances, all purchasers of China-Biotics' common stock during the Class Period suffered
similar injury through their purchase of China-Biotics' common stock at artificially inflated
prices and a presumption of reliance applies.
NO SAFE HARBOR
55. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
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Many of the specific statements pleaded herein were not identified as "forward-looking
statements" when made. To the extent there were any forward-looking statements, there were
no meaningful cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking statements.
Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking
statements pleaded herein, Defendants are liable for those false forward-looking statements
because at the time each of those forward-looking statements was made, the particular speaker
knew that the particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of China-Biotics who knew
that those statements were false when made.
FIRST CLAIM
Violation of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants
56. Plaintiff repeats and re-alleges each and every allegation contained above as if
fully set forth herein.
57. During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff
and other members of the Class to purchase China-Biotics' common stock at artificially inflated
prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, and
each of them, took the actions set forth herein.
58. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (iii) engaged in acts, practices, and a course of business which
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 19 of 25
operated as a fraud and deceit upon the purchasers of the Company's common stock in an effort
to maintain artificially high market prices for China-Biotics common stock in violation of
Section 10(b) of the Exchange Act and Rule 1 Gb-S. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as controlling persons as
alleged below.
59. Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about China-Biotics'
financial well-being, business relationships, and prospects, as specified herein,
60. Defendants employed devices, schemes and artifices to defraud, while in
possession of material, adverse, non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of China-Biotics' value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about China-Biotics and its business
operations and future prospects in light of the circumstances under which they were made, not
misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of China-Biotics'
common stock during the Class Period.
61. Defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. Such
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 20 of 25
Defendants' material misrepresentations and/or omissions were done knowingly or recklessly
and for the purpose and effect of supporting the artificially inflated price of its common stock.
62. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of China-Biotics'
common stock was artificially inflated during the Class Period. In ignorance of the fact that
market prices of China-Biotics' common stock were artificially inflated, and relying directly or
indirectly on the false and misleading statements made by Defendants, or upon the integrity of
the market in which the common stock trades, and/or in the absence of material, adverse
information that was known to or recklessly disregarded by Defendants, but not disclosed in
public statements by Defendants during the Class Period, Plaintiff and the other members of the
Class acquired China-l3iotics' common stock during the Class Period at artificially high prices
and were damaged thereby.
63. At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the
other members of the Class and the marketplace known that the Company fabricated (i) a false
sales contract; (ii) a false bank website; and (iii) a false bank advice in furtherance of its scheme
to fraudulently create the appearance of having achieved a 50% growth in 2011 revenue, which
were not disclosed by Defendants, Plaintiff and other members of the Class would not have
purchased or otherwise acquired their China-Biotics common stock, or, if they had acquired
such common stock during the Class Period, they would not have done so at the artificially
inflated prices which they paid.
64. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act and Rule I Ob-5 promulgated thereunder.
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 21 of 25
65. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company's common stock during the Class Period.
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange Act Against The Individual Defendants
66. Plaintiff repeats and re-alleges each and every allegation contained above as if
fully set forth herein,
67. The Individual Defendants acted as controlling persons of China-Biotics within
the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-
level positions, and awareness of the Company's operations and/or intimate knowledge of the
false statements described herein that were disseminated to the investing public, the Individual
Defendants had the power to influence and control and did influence and control, directly or
indirectly, the decision-making of the Company, including the content and dissemination of the
various statements which Plaintiff contends are false and misleading. The individual
Defendants were provided with or had unlimited access to the Company's internal controls, and
the financial condition of the Company, issued the statements that Plaintiff alleges are
materially false and misleading, and/or shortly after these statements were issued and had the
ability to cause the statements to be corrected,
68. In particular, the Individual Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
69. As set forth above, the Individual Defendants violated Section 10(b) and Rule
lOb-5 by his acts and omissions as alleged in this Complaint. By virtue of their positions as
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 22 of 25
co nt rolling persons, the individual Defendants are liable pursuant to Section 20(a) of the
Exchange Act As a direct and proximate result of the Individual Deinddants' wronful
Conduct, Plaintiff and other members of the Class suffered damages in connection with their ZD
purchases of the Company's coJntTh.)ti stock ciwing the Class Period
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a) Determiring that this action is a proper class action under Rule 23 of the
Federal ft tiles of GVJI Proced ire;
(b) Awarding damages 1.11. favor of Plaintiff and the other Class members
against all Detdndants for all daniages sustained as a result of i.)e:lnidaiiEs' wrongdoing,
in all 111.1110U.11 1. 10 he proven at trial, including i:nterest thereon;
(c) Awarding Plaintiff and the Class their reasonable costs and expenses
incurred in this action, including counsel ides and expert fees; and
(cI) Such other and further relief as the Court may deem j tist and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by my.
Dated: May 25, 20 12
FGLFON LAW FIRM.
B y : (ire oi M. Egle'ston 44 Park Avenue South, 5th Floor Nv York, NY 10016 Tlephone: (212) 683 73400 Facsimile: (212) 683-3402 Email: cgeston4denie-la\vcom
'22
Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 23 of 25
GAINEY & MCKENNA Thomas J. McKenna 440 Park Avenue South, Rh Floor New York, NY 10016 Telephone: 212-983-1300 Facsimile: 212-983-0380 E-mail: m1aw200i@yahoocom Email: La@Zginey-andmckennaxorn
Attorneys for Plaintiff
23
Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 24 of 25
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ELI1e4 this day of &]ey, 2012
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Case 1:12-cv-04202-NRB Document 1 Filed 05/25/12 Page 25 of 25
Exhibit Mo the David Casper Certification