ChinaCast files for Chapter 11

January 2017 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

To allow the pursuit of embezzlement claims against former executives, as well as cushioning itself from an investor class action lawsuit, college e-learning company ChinaCast Education Corp. announced that it has filed for Chapter 11 bankruptcy protection.

The filing, in the US District Court for the Southern District of New York, was made one day after a California federal judge issued a $65.8m default judgment against the company over class claims regarding its chief executive looting $120m from ChinaCast coffers.

The default judgement – made due to ChinaCast’s absence in the case – stems from a 2012 case which involved a class of investors suing ChinaCast, the allegation being that the company was responsible for the looting perpetrated by its founder and former CEO, Ron Chan Tze Ngon. The allegation caused the company’s stock to drop from $4.24 a share to 82 cents a share after the fraud was exposed.

Then, in November 2012, US District Judge John F. Walter dismissed the suit, ruling that Chan was the “only corporate agent who may supply the requisite scienter”, and was acting completely against ChinaCast’s interests. However, investors then appealed, and in October 2015 the United States Court of Appeals for the Ninth Circuit revived the class action, ruling that Chan’s fraud and misconduct could, in fact, be imputed to ChinaCast, even though the CEO’s alleged embezzlement and misleading of investors were adverse to the company’s interests.

“As a result of Chan’s looting of ChinaCast in 2012... the debtor was left in financial ruin, has no current operations and is winding up its affairs,” said Douglas Woodrum, ChinaCast’s chief financial officer. According to Mr Woodrum, ChinaCast had been scheduled to appear at a default judgment hearing on 14 November but had not answered a post-appeal complaint due to insufficient resources.

In the event, that hearing was vacated by Judge Walter, who stated that ChinaCast must pay the $65.8m amount to a certified class of ChinaCast investors who purchased company stock between 14 February 2011 and 2 April 2012.

In its petition, ChinaCast had listed its estimated assets as being between $500m and $1bn, and its estimated liabilities anywhere between $10m and $50m. In reference to the latter figure, Woodrum said that about $9.4m of it was debt from recovery lawsuits filed by ChinaCast and around $12.9m was owed to vendors, professionals and other commercial parties.

Founded in 1999, ChinaCast was one of many hundreds of Chinese companies that entered the US stock markets over the last 10 years by means of a reverse merger. The company went public in the US in 2006 and traded on the Nasdaq exchange from 2007 until it was delisted in 2012 for failing to file its annual report. It was worth a reported $200m at the time.

However, many of the companies which sought to bypass the lengthy and complex process of going public have found themselves facing lawsuits or enforcement actions for alleged securities fraud, as well as being delisted from US exchanges.

During the course of its filing for Chapter 11 bankruptcy protection, ChinaCast is being represented by Tracy L. Klestadt and Joseph C. Corneau of Klestadt Winters Jureller Southard & Stevens LLP.

Currently winding down its business, ChinaCast has said in its bankruptcy filing that its Chapter 11 plan would establish a litigation trust to try to recover the embezzled funds. Whether this means that investors will be fully compensated, outstanding legal bills paid and ChinaCast’s former top brass (Mr Chan) brought to account, the filing does not overly explain.

Fraser Tennant