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By Jef Feeley
Aug. 26 — ChinaCast Education Corp. sued its former chairman Aug. 25 in the Delaware Court of Chancery over claims that 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 alleges in the lawsuit.
Chan and Jiang also transferred ownership of three Chinese colleges that ChinaCast bought to associates outside the company once newly elected directors took steps to oust the men, according to the complaint. “As a result of these transfers, ChinaCast no longer owns its three most significant revenue-generating assets,” officials allege in the lawsuit.
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 lawsuit.
The lawsuit comes almost a year after the 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. Reverse mergers, particularly those involving China-based firms, have faced increased regulatory scrutiny for years.
The Hong Kong-based e-learning company had a market capitalization of more than $200 million before the alleged frauds were uncovered after a newly elected board took control in 2012, according to the lawsuit.
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 electing new directors. Vice Chancellor 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 lawsuit. 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 lawsuit.
Deloitte & Touche LLP, ChinaCast's auditors, were sued by a group of investment funds in the U.S. District Court for the Southern District of New York in February 2013 for failing to uncover fraud at the company that allegedly caused millions in losses.
To contact the reporter on this story: Jef Feeley in Wilmington, Del. at email@example.com
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The complaint is available at http://www.bloomberglaw.com/public/document/ChinaCast_Education_Corp_vs_Ron_Chan_Tze_et_al_Docket_No_10063_De
©2014 Bloomberg L.P. All rights reserved. Used with permission.
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