China Medical Technologies Executives Charged in Fraud Case

(Bloomberg) -- The founder and a former executive of China Medical Technologies Inc. were charged in the U.S. with stealing more than $400 million from investors in the bankrupt maker of medical diagnostic tests as part of a seven-year scheme.

Xiaodong Wu, 59, who was chief executive officer of the Beijing-based company, and former Chief Financial Officer Tak Yung Samson Tsang, 46, allegedly lied about how they would spend the proceeds of note offerings from January 2005 to November 2012, saying they would be used for general corporate purposes, to buy businesses and technologies and to repurchase outstanding notes, prosecutors said.

Prosecutors said the two men diverted more than $400 million to entities controlled by or affiliated with them. Wu and Tsang also allegedly forced China Medical’s independent director and outside auditor to resign, halted public disclosures of material events affecting its securities and ceased making interest payments. The note offerings were based on intellectual property that was more than two decades old, off-patent, and had minimal value, according to federal prosecutors in Brooklyn, New York, where an indictment was unsealed Monday.

Both men live in China and are fugitives, prosecutors said. Nellin McIntosh, a spokeswoman for the U.S. Attorney in Brooklyn, declined to comment on possible extradition proceedings. The U.S. does not have an extradition treaty with China, according to a list posted on the U.S. Department of State’s website.

China Medical filed for Chapter 15 foreign-firm bankruptcy protection in New York in August 2012, listing as much as $500 million in assets and debt. The company also listed foreign bankruptcy proceedings pending in the Cayman Islands, according to a petition posted in U.S. Bankruptcy Court in Manhattan.

Short Sellers

China Medical first went public in August 2005, raising $96 million by selling 6.4 million shares at $15 each. The company was among Chinese companies spotlighted by short sellers in 2011, with its shares plunging after a report from Glaucus Research Group issued in December of that year alleging that the medical device-maker defrauded investors.

The Glaucus report alleged the company swindled shareholders by overpaying for an acquisition to help the company’s chairman embezzle funds and selling its core business to hide that China’s regulator had suspended or was close to ending an important permit. China Medical denied the fraud allegations and said the allegations “attribute motives to management that are based on innuendo and fail to take into account business and commercial considerations.”

Its American depositary receipts were delisted from the Nasdaq in March 2012. Three months later, debtholders of China Medical asked for the company to be liquidated after it missed interest payments and the U.S. Securities and Exchange Commission suspended trading of the ADRs, citing questions on the accuracy of information it provided in statements and filings.

Chapter 15 helps shield overseas companies from U.S. lawsuits and creditor claims while a company continues bankruptcy proceedings abroad. The company in various documents listed operations in Beijing, Hong Kong and the Cayman Islands. Its official liquidator said in a bankruptcy filing that “it appears” the company’s financial troubles resulted from alleged “fraudulent transfers” of assets, and that much of its money was missing.

The case is U.S. v. Wu, 17-cr-00144, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at cdolmetsch@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Michael Hytha, Peter Blumberg