Another SEC Action Against A Chinese Issuer

Chinese companies that went public through a reverse merger continue to be the subject of Commission enforcement actions. This time China Sky One Medical, Inc., along with its chairman, Yan-Qing Liu, were named as defendants in a financial fraud complaint. SEC v. China Sky One Medical, Inc., Civil Action No. CV12-7543 (C.D. Cal. Filed Sept. 4, 2012).

China Sky One or CSKI is a holding company that conducts business through subsidiaries in the Peoples Republic of China. In May 2006 the company conducted a reverse merger. Its shares were initially traded on the American Stock Exchange and later on the NASDAQ Global Market. The company makes and sells Chinese medical, health and beauty products, including pain relief and weight loss patches.

In its Form 10-K for 2007 and a subsequent 10-Q the company reported it had entered into a strategic distribution agreement with Takasima Industries (M) Sdn. Bhd., a fitness equipment manufacturer and retailer based in Penang, Malaysia. Under the agreement Takasima would become an exclusive sales agent of CSKI’s slim patches in Malaysia. The company planned to repackage the product and sell it under its name. CSKI’s management stated that the agreement was expected to produce about US $12 million in annual sales in 2007 with a net profit margin of about 20%. The representations were false, according to the complaint.

The Form 10-K also represented that Ningbo Yuehua International Trading Company and Guangzhou Xinghe International Trading Company were two of its top customers in 2007. The two companies were supposed to be sales agents for Takasima. All of the sales to the two agents were exports to Malaysia through Takasima for CSKI’s slim patch. In 2007 CSKI recorded about $12.2 million in sales to these companies. In 2008 those sales totaled about $7.5 million. The sales were false, according to the complaint, resulting in an overstatement of net income in 2007 by about 33.1% and 8.9% for 2008.

In December 2011, CSKI’s CFO resigned. Mr. Liu, who has been on sick leave since December 2011, continues as CEO. Following the resignation of 26 mid-level managers in March 2012, NASDAQ halted trading in the stock of the company. The firm also failed to file its annual report on Form 10-K for the year ended December 31, 2011 and its Forms 10-Q for the subsequent two quarters.

The complaint alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation. See also Lit. Rel. No. 22470 (Sept. 4, 2012). A related proceeding was filed against the company under Exchange Act Section 12(j). In the Matter of China Sky One Medical, Inc., Adm. Proc. File No. 3-15005 (Sept. 4, 2012).

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