China Armco Metals, Inc. (NYSE:CNAM) and its Board of Directors should have familiarized themselves with the quote from the famous Scottish novelist, playwright and poet Sir Walter Scott, “Oh what a tangled web we weave, When first we practice to deceive. “before embarking on a stock sale that went from bad to worse.
The deception begins on June 25, 2010 when CNAM’s Chairman of the Board and holder of 34.8% of the issued and outstanding shares of the Company’s stock, Kexuan Yao, issued a Representation Letter to his attorney to remove the restrictive legend on two of his certificates to effectuate a loan of $2.8 million. In this Representation Letter, Yao falsely attested that his 1.3 million shares represented 1% of the issued and outstanding shares. In reality, the 1.3 million shares represented 9% of the issued and outstanding shares. Why would Yao make this false claim? Because, according to rules set by the Securities and Exchange Commission Yao could only remove the restriction if the 1.3 million shares represented 1% or less of the issued and outstanding shares.
The cancerous acts of fraud are not isolated to the Chairman of the Board. Frighteningly the acts of deception has metastasized throughout the Company’s entire board of directors all of whom are in some way responsible for either the original fraudulent transfer of stock or in covering up the fraudulent transfer.
There is no question that the Representation Letter signed by Yao claiming that 1.3 million shares represent 1% or less of the 14,355,532 issued and outstanding shares is fraudulent. Even accounting for any issues in translating Chinese to English and vice verse, math is a universal language and anyone with a calculator should know better than to make such claim. To facilitate the fraudulent transfer of Yao’s stock, the Company’s CFO Fentao Wen notarized an Irrevocable Transfer Instruction letter complete with the Company’s seal and sent it off to the Company’s transfer agent to assist the transfer of Yao’s shares.
As if this original sin was not bad enough, Yao and the complicit Board of Directors covered up the fact that its Chairman sold 26% of his holdings in the Company through false filings with the SEC and by violating the rules set by the SEC enacted to inform the shareholders of significant events occurring within the corporation.
Yao, the Board of Directors and the Company itself breached its fiduciary duty to its shareholders and violated the rules of the SEC by failing to inform either about “…major events that shareholders should know about.” through an 8-K filing. The Company was required to file within four days the fact that Yao transferred 26% of his CNAM stock on June 29, 2010; the fact that on or about June 30, 2010 the Company investigated and corporate counsel concluded that Yao was in violation of SEC Section 5 of the Securities Act of 1933 via participant liability in the sale of his unregistered securities and was subject to prosecution by the SEC; and the fact that a lawsuit was filed in the Nevada U.S. District Court on September 16, 2010 alleging fraud by Yao, the Board of Directors and seeking a Receiver to take over the Company itself.
How can we, the public, know that the actions of Yao and the subsequent cover up are fraudulent? We only have to look to the Company’s corporate counsel. In a letter dated June 30, 2010 counsel for China Armco Metals, Inc. sent Transcend Capital the broker holding what was once Yao’s shares a letter stating: “These Shares were purportedly assigned to the Fund as collateral for a so-called structured transaction agreement between the Fund and Mr. Yao which China Armco contends was not a bona fide loan transaction and appears to be a device or machination to circumvent the provisions of Section 5 of the Securities Act of 1933 and the prescribed requirements of Rule 144 thereunder.”
All of these events are major events that the shareholders of the Company should be made aware. They weren’t. How can a Company that hides its errors be trusted? It can’t.
In my opinion what started as an isolated case of fraud has snowballed into a serious case of corporate mismanagement and abuse. The Company and its Board of Directors have tried hard to hide its violations of securities laws to no avail. This deceit is only the first of many that jeopardizes the integrity of the Company and the financial well being of its shareholders.